As a fictional example, Company A, an importer, must pay USD 1 million for goods in 6 months. Company A has entered into an FX forward with Bank B to buy those USD 1 million at 148.00 yen per dollar. The spot exchange rate on the day the forward was agreed is 150.00 yen per dollar. If the spot exchange rate on the delivery date is 140.00 yen per dollar, how does Company A's payment compare with its payment without the forward?
Quiz: FX Forwards and FX Swaps
Last reviewed: September 25, 2026
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5 questions to check your understanding of the chapter “FX Forwards and FX Swaps”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: C
With the FX forward, Company A pays 148 million yen (USD 1 million × 148.00 yen) whatever the spot exchange rate is on the delivery date. Without the forward, Company A would buy dollars at the spot exchange rate on the delivery date and pay 140 million yen (USD 1 million × 140.00 yen). With the forward, Company A therefore pays 8 million yen more than it would without it. If instead the yen weakens to 160.00 yen on the delivery date, Company A pays 12 million yen less than it would without the forward. In both cases, currency risk does not make the payment go up or down.
"It pays 8 million yen less" gets the direction wrong. "It pays 10 million yen more" is the amount you get if you mistake the contract rate for the spot exchange rate of 150.00 yen on the day the forward was agreed (USD 1 million × (150.00 − 140.00)). Company A's contract rate is 148.00 yen. Company A pays the same amount as without the forward only when the spot exchange rate on the delivery date equals the contract rate of 148.00 yen.
Learn more: FX Forwards
Question 2
As a fictional example, suppose that the spot exchange rate is 150.00 yen per dollar, the yen interest rate is 0.50% a year, and the dollar interest rate is 4.50% a year, with interest counted on 365 days for yen and 360 days for dollars. The forward exchange rate for delivery in 180 days is then 147.061 yen, which shows a stronger yen than the spot exchange rate. Which statement about this forward exchange rate is correct?
Answer and explanation
Answer: B
The forward exchange rate is the rate at which investing in yen gives the same result as converting into dollars and investing in dollars. Writing this relationship as a formula gives covered interest parity. When the dollar interest rate is higher than the yen interest rate, converting into dollars and depositing them earns a higher interest rate. For the two investments to give the same result, the rate for converting the dollars back into yen in 180 days must show a stronger yen and a weaker dollar than the spot exchange rate by that much. A forward exchange rate that shows a stronger yen and a weaker dollar than the spot exchange rate in this way is called a dollar discount. In this example, the difference between the forward and spot exchange rates (the forward points) is −293.90 sen.
The forward exchange rate does not show how market participants see the future spot exchange rate. It is set by the interest rate differential between the two currencies. A dollar premium is the opposite case: the yen interest rate is higher than the dollar interest rate, and the forward exchange rate shows a weaker yen than the spot exchange rate. If you link the higher dollar interest rate with the word "premium," it is easy to mix up the names.
Learn more: Covered Interest Parity and FX Forward Points
Question 3
As a fictional example, Bank F has entered into a USD 10 million FX swap with Bank G. In the near leg (the trade that settles first), Bank F buys dollars at 150.00 yen per dollar. In the far leg (the trade that settles later), 180 days later, it sells the same USD 10 million at 147.061 yen per dollar. How many yen does Bank F receive in the far leg?
Answer and explanation
Answer: A
In an FX swap, the same amount of foreign currency is bought and sold in opposite directions in the two legs. In the far leg, Bank F pays USD 10 million and receives 1,470.61 million yen (USD 10 million × 147.061 yen). The yen Bank F paid in the near leg was 1,500 million yen (USD 10 million × 150.00 yen). The yen it receives in the far leg is 29.39 million yen less than the yen it paid in the near leg. The difference between the rates of the two legs is the forward points of −293.90 sen (−2.939 yen).
"1,500 million yen" is the same as the yen paid in the near leg. The far-leg rate differs from the near-leg rate by the forward points. "29.39 million yen" is the difference between the yen amounts of the two legs. There are also no interest payments between the two legs.
Learn more: FX Swaps
Question 4
As a fictional example, a company has entered into a non-deliverable forward (NDF) with a bank. The notional amount is USD 15 million, the contract rate (the rate agreed in the NDF) is 84.00 Indian rupees per dollar, and the company sells rupees and buys dollars. The settlement currency is the dollar. If the fixing (the rate used to set the difference) on the valuation date (the day the difference is set) is 90.00 rupees per dollar, what happens on the settlement date?
Answer and explanation
Answer: D
In an NDF, the principal amounts of the two currencies are not delivered, and only the difference is paid in dollars. The difference in rupees is USD 15 million × (90.00 − 84.00), or 90 million rupees. Dividing this by the fixing of 90.00 gives the settlement amount of USD 1 million. With the notional amount as , the contract rate as , and the fixing as , the amount received by the company, the rupee seller, is .
Because the fixing shows a weaker rupee than the contract rate, the company, as the rupee seller, receives the settlement amount, and the bank pays it. If instead the fixing shows a stronger rupee at 80.00 rupees, the company pays the bank USD 750,000. "The company pays the bank USD 1 million" gets the direction wrong. About USD 1.07 million is 90 million rupees divided by the contract rate of 84.00 rather than the fixing (90 million ÷ 84.00), which uses the wrong rate in the formula. The 90 million rupees is the difference before it is converted into dollars.
Learn more: Non-Deliverable Forwards (NDF)
Question 5
As a fictional example, Bank L has entered into a 2-year cross-currency swap with M Securities, with a dollar principal of USD 100 million and a yen principal of 15 billion yen. The yen principal is the dollar principal converted at the starting spot exchange rate of 150.00 yen per dollar. At the start, Bank L paid yen and received dollars. The swap does not adjust its principal during the term. If the spot exchange rate at maturity is 160.00 yen per dollar, how is the principal exchanged at maturity?
Answer and explanation
Answer: B
In a cross-currency swap that does not adjust its principal during the term, the final principal exchange also uses the spot exchange rate at the start. So even if the spot exchange rate moves during the term, Bank L pays the same USD 100 million at maturity as at the start and receives 15 billion yen. Measured at the spot exchange rate of 160.00 yen at maturity, the USD 100 million Bank L pays are worth 16 billion yen, and the difference of 1 billion yen from the 15 billion yen it receives is Bank L's loss. If the spot exchange rate at maturity is 140.00 yen, Bank L instead gains 1 billion yen. If Bank L has made a 2-year loan of the USD 100 million it received, the repayment of the loan covers the dollars it pays under the swap, so the yen it receives at maturity is 15 billion yen in both cases.
The 16 billion yen is the amount you would get if the principal were exchanged at the spot exchange rate at maturity. "Bank L receives USD 100 million and pays 15 billion yen" gets the direction of the final exchange wrong: Bank L, which paid yen and received dollars at the start, pays dollars and receives yen at maturity. The 1 billion yen choice is the gain or loss on the final principal exchange, and in a swap that does not adjust its principal, the principal itself is exchanged, not a difference.
Learn more: Cross-Currency Swaps