(Inherent in Forward Blotters)

All currencies are ranked such that the higher ranked currency will be the first currency (CCY1) in any pair, and the lower ranked currency will be the second (CCY2)

Ranking reflects the market convention so for example

£ ranked 1
$            2
DEM      3

Therefore for "cable" £ is CCY1 and $ is CCY2 (£1=$x) or, Sterling Mark £ is CCY1, DEM is CCY2 (£1=DEM x).  Provided all forward trading is in "round" amounts of CCY1 currency, or spot trades are undertaken to maintain a nett zero position of CCY1 amounts, movement in the spot rate of exchange will generate equal and opposite flows on spot versus forward dates.

In this way the forward dealer can trade forward points without seeing his P/L change due to spot rate changes.

It is recognised that P/L flows which change with every spot change throughout the life of the deal, are subject to funding costs. 

Different banks will address this problem in different ways, however you can chose two ways in which the cost could be "hedged" by the forward trader himself:-

		a) Where P/L continues to be accrued, we establish a cash flow hedge where, for any spot rate movement, sufficient P/L is generated( in the CCY2) to cover the funding requirements at the input(known) CCY2 6 months deposit rate.
		b) Where P/L is NPV'd, reflecting the role of spot in the forward point arbitrage calculation, we can discount all CCY1 currency flows such that, if squared, the book is hedged against cash flow in the CCY2.

It should be remembered that the Dealer, therefore, has discretion over the hedge and can, if he wishes, over ride it to profit from positive cash flow generation.

		N.B. All positions are funded, O/N, T/N etc. by squaring the CCY1 currency amounts on any day

Other Tpoics: Trading Profit & Loss; Cash Flow Liquiidity; Sixes Equivalent;
Cash Flow Hedge; Spot Date Calculation; Ladder Files; Carried Forward Balance;
Nett Cash Flow; Automatic Profit & Loss; Zero Coupon rates; &
Nett Present Value Profit & Loss.

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