Rolling a mismatched FX swap when the forward leg is less than the spot leg

CFA Level III Derivatives
#1

I have seen plenty of examples of a mismatched FX swap where the forward leg, because it’s greater than the spot leg, dictates whether the spot leg uses the bid or the offer. However, I am yet to see an example of a mismatched swap where the forward leg is less than the spot leg. In that case, would it be the exact opposite or is it more nuanced than that?

Let’s take the example of Jiao Yang from the CFAI reading (Reading 10, Section 9.1.1). He has a short 8MM EUR vs. the HKD which he is about to roll. Rates are:

HKD/EUR Spot: 10.0200/10.0210
3 month Forward points: 125/135

In the book’s example, his view is that the EUR spot rate will depreciate more, so accordingly, the size of his EUR FWD leg > the spot leg. As a result, the bid is used for both the short EUR fwd and long EUR spot.

My question is how should we approach this if the EUR FWD leg < the spot leg? Would we consider the spot and forward legs separately (which in this case would be to use the bid side for the EUR FWD and offer side for the spot)? Or, because the Spot leg >FWD leg, should we use the offer side for both legs?

#2

I think that it’s stupid that there’s not such an example in the curriculum.

However, I have an example in one of my mock exams: Exam #1, PM session.

I believe that in your example you would use the offer for both legs. Together, the spot leg and the forward leg represent a net purchase.

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#3

That makes sense. Thanks!