Assume you are a corporate customer – therefore, a price taker. You need to sell AUD versus USD outright for delivery in 3 months. ANZ and Westpac’s spot prices are 0.7515/19 and 0.7518/23 respectively. Their 3 month FX swap prices are 37/36 and 38/37, respectively. By combining the prices from both banks, the best possible available 3 month hedge rate is:

Question

BlackTom AI · Accepted Answer

We are treating this as a hedging question for a corporate customer who is a price taker and wants to sell AUD against USD for delivery in 3 months.

First, restate the given data clearly:
- ANZ spot (bid/offer): 0.7515 / 0.7519
- Westpac spot (bid/offer): 0.7518 / 0.7523
- 3-month FX swap points (quote style not explicitly tied to bid/offer in the prompt, but the numbers given are 37/36 for ANZ and 38/37 for Westpac)

Key principle: when you are selling AUD forward (i.e., delivering AUD in 3 months and receiving USD), you lock in a forward rate using the bank’s bid price for the spot leg and the forward points that apply to selling AUD. In practice, you combine the bank’s bid rate with the appropriate forward points to get the 3-month hedge rate.

Option-by-option reasoning (with the available data):
- Option A (not shown here) would need to be evaluated against the same method; since we only have one explicit choice in the data, focus on what this single computed rate represents.

Evaluating the best hedge using the Westpac data (as the result suggests):
- Westpac bid spot for AUDUSD is 0.7518 (you would receive this rate when selling AUD at spot today). Since you are hedging for 3 months, you must incorporate the 3-month forward points (swap points) to obtain the forward rate.
- Westpac 3-month forward points are quoted as 38/37. For hedging a sale of AUD (delivering AUD in 3 months), you take the bid spot and apply the relevant forward points that correspond to selling AUD forward. The commonly used convention in this context is to subtract the forward points for a sale of AUD forward from the current spot bid to lock in the 3-month hedge rate.
- Using the lower 3-month forward point figure available for the bid side to maximize the USD you receive (i.e., the option that yields the best hedged rate for selling AUD), we use 0.7518 − 0.0037 = 0.7481.

Numerical calculation details:
- 3-month forward points to apply (from Westpac): 37 (the lower of the two listed points when aligning with the bid/hedge perspective)
- Convert points to decimal: 37 pips = 0.0037
- Subtract from the spot bid: 0.7518 − 0.0037 = 0.7481

Why this is the best available hedge rate among the provided data:
- We are looking to maximize the effectiveness of a hedge for delivering AUD in 3 months. This means locking in the highest possible USD per AUD rate that we can actually achieve by using the best combination of bid price and forward points for a forward sale. The Westpac bid spot (0.7518) combined with the smaller forward point adjustment (0.0037) yields 0.7481, which is higher than the alternative combinations that would use ANZ’s bid or larger forward deductions.
- The other bank (ANZ) offers a bid of 0.7515 with forward points around 0.0036–0.0037; applying those would give approximately 0.7515 − 0.0036 ≈ 0.7479, which is worse than 0.7481.

In summary, using Westpac’s best available bid and applying the 3-month forward points appropriate for a forward sale results in the hedge rate of 0.7481. This aligns with the approach of selecting the combination that provides the most favorable locked rate for delivering AUD in 3 months while selling AUD for USD.

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