The study of factors and methods of swap points calculation for long-term forward contract, case study of Charoen Pokphand Group

Abstract

The purpose of this study is mainly to study the factors and compare the methods of swap points calculation for long-term forward contract of Charoen Pokphand Group in order to reduce the loss of firm value from receiving overpriced forward rates quotation. In this study, there are 3 theories and methods used to calculate long-term swap points as follows: 1) Compound Interest Rate method. 2) Zero-Coupon Bond method. 3) Cross Currency Swap method. The interest rate data is collected from 6 January 2020 to 14 February 2020 to calculate the 3-year swap points for buying US dollars forward contract by each method and then analyze the data and compare each method that provide the swap points close to the real price offered by commercial banks. The hypothetical testing suggests that Cross currency swap method provides the swap points that is statistically insignificant at 5% level. This means that Cross currency swap method provides the rate that is not different from actual price quote by commercial bank. While the swap points by Compound Interest rate method and Zero-Coupon Bond method are different from actual price at 5% level of significance base on Paired-sample t-test.   However, as far as implementation is concerned, the F/X management team will use the calculated swap point rate as reference and compare with the prices offered by the competitive commercial banks for consideration before deciding the long-term forward contract offers.