Economics · Foreign Exchange Market
A Forex dealer at an Indian bank handles a complex 'Swap' transaction for a corporate client. The client wants to swap a fixed-rate loan for a floating-rate loan in USD. The dealer notices that the Forward PV Points are moving rapidly due to unexpected changes in the Federal Reserve's interest rate outlook. The spot rate is 83.00, and the 12-month forward points have widened from 150/160 to 200/210 within an hour. What does this widening of the spread and the increase in points signify for the cost of hedging for an importer?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The spread widening indicates higher liquidity and lower risk in the FOREX market.
- 2The rupee is strengthening, and the importer should cancel their forward contracts to gain from revenue receipts.
- 3The dollar premium is increasing, making it more expensive for the importer to hedge their future payables.✓
- 4The dollar is moving to a deeper discount, making it cheaper for the importer to buy forward.
Correct answer
The dollar premium is increasing, making it more expensive for the importer to hedge their future payables.
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