Currency Risk Management: Matched and Mismatched Near/Far legs of FX Swaps

[ov25]

Could someone throw light on Matched and Mismatched Near/Far legs of FX Swaps?
You match when the outlook for currency is steady/ undecided; However you mismatch rolling your FX exposure using a forward swap when the currency appreciates (or depreciates)
Can someone please take an example to show the motivation of the manager or strategy that leads to this dynamic hedge. In other words how will the manager profit from matched/mismatched FX swaps vs using manager expectations and decide whether to hedge or not entirely.
Thanks in advance

 

[Riptrix]

All an FX Swap is in practicality is rolling your position to a far date and when maintaining your incumbant hedge, using a matched FX swap for that purpose.
I’m a US investor hedging (selling) EUR 100M for value 4/30
On 4/28, I’ll roll my hedge for another month. I’m going to buy the EUR 100M for 4/30 SPOT and then SELL the EUR 100M forward to 5/31. This is a MATCHED swap. The counterparty will give me the MID price on the spot for the near and the far leg. He will add forward points to the far leg.
If, in the next month, I believe that EUR will appreciate more (in the case of EUR interest rate < US) or depreciate less (in the case where EUR interest rate > US) than what the forward market is pricing EUR at, then I’ll want to HEDGE LESS than my current position. Now, I’d BUY EUR 100M for 4/30 SPOT (closing my current position) and then sell an amount less than EUR 100M 5/31.
You’d also have a mismatched swap if you were to rebalance at the same time as rolling. You’d close down your near leg and open up the far leg in the new required hedge amount. That new required hedge amount is the incremental or decremental move in the underlying to be hedged.