Offshore Rates

# CHAPTER 3: FOREIGN EXCHANGE

### Onshore and Offshore Rates

Kuala Lumpur Interbank Offer Rates (KLIBOR) are benchmark MYR money market rates which are fixed at 11.00 am. The rates are contributed by banks in Kuala Lumpur and are being averaged after taking out the highest and the lowest rate. These rates represent the rates at which banks are willing to lend to another bank for the relevant tenor. Other currencies have their own ‘Interbank Offer Rate’ (IBOR) and are available in various financial centres. London Interbank Offer Rate (LIBOR), for instance is available for five major currencies - USD, EUR, GBP, JPY and CHF.

For Malaysian banks, borrowing and lending of MYR can be mostly done close to or around KLIBOR. However, the same cannot be said with borrowing and lending of foreign currencies such as USD. Historically, borrowings of USD by Malaysian banks have been above LIBOR primarily due to our country's rating as well as the international rating of banks in the country. Banks originated from emerging market countries share the same fate and have to borrow at rates higher than LIBOR, and some may be higher than the other. For instance, if a Malaysian bank borrows USD for three months at LIBOR + 30bps, a Vietnamese bank may only be able to borrow USD for three months at LIBOR + 50bps. On the other hand, foreign banks are not able to lend or borrow MYR directly due to regulations imposed. Indirect borrowing and lending therefore are done using foreign exchange swap.

For our discussion Table 3-8 will be used and;

1. an offshore MYR rate can be calculated. We can refer to this as the implied MYR rate.
2. an implied USD rate can be calculated.

#### Offshore MYR Rates

The implied MYR rates calculated from the USD/MYR swap points is often referred to as the offshore MYR rate. Deriving the offshore MYR rate curve is simple and Equation 3-2 can be used.

#### Implied USD Curve

An implied USD curve can also be generated from market information using Equation 3-2. The Equation, however, have to be modified to solve for the rate of the commodity currency i.e.:

$$r_{usd} =\left( \dfrac{ \textrm{FX Rate}\left( 1 + rd_{MYR} \right)}{\textrm{FX Forward}} - 1 \right) \dfrac{1}{d_{USD}}$$

The result of our calculation is presented as Table 3-11 below.

#### Summary

A forward foreign exchange contract is a function of interest rate differential between two countries. It can be broken down into a spot FX transaction an FX swap. An FX swap is the net interest rate differential between the two countries and can be imitated through lending and borrowing activities. The implied rate from the swap can be calculated and compared against quoted interest rate for arbitraging opportunities.

A full fledge calculator on all that have been discussed in this chapter is provided in the 'Calculators' section. Click on the Foreign Exchange tab and select FX Contracts.