As a foreign exchange trader for JPMorgan Chase, you have just called a trader at UBS to get quotes for the British pound for the spot, 30-day, 60-day, and 90-day forward rates

Your UBS counterpart stated, "We trade sterling at $1.7745-50, 47/44, 88/81, 125/115 ." What cash flows would you pay and receive if you do a forward foreign exchange swap in which you swap into £5,000,000 at the 30-day rate and out of £5,000,000 at the 90-day rate? What must be the relationship between dollar interest rates and pound sterling interest rates?

The fact that you are swapping into £5,000,000 at the 30-day rate forward rate means that you are paying dollars and buying pounds. You would do this transaction at the bank's 30-day forward ask rate. To find the forward ask rate, you must realize that the 30-day forward points of 47/44 indicate the amounts that must be subtracted from the spot bid and ask quotes to get the forward rates. We know to subtract the points because the first forward point is greater than the second. Hence, the first part of the swap would be done at $1.7750/£ - $0.0044/£ = $1.7706/£. Therefore, to buy £5,000,000 you would pay
$1.7706/£ £5,000,000 = $8,853,000
In the second leg of the swap, you would sell £5,000,000 for dollars in the 90-day forward market. Because you are selling pound for dollars, you transact at the 90-day forward bid rate of $1.7745/£ - $0.0125/£ = $1.7620/£. Therefore, you would receive
$1.7620/£ £5,000,000 = $8,810,000
Notice that you get back fewer dollars than you paid, but you had use of £5,000,000 for 60 days. Thus, the pound must be the higher interest rate currency.