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rickyvic
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Joined: February 25th, 2011, 4:56 pm

FX Swaps carry and mk2mkt question

November 22nd, 2011, 5:38 pm

Hi guys I understand this is a very basic question. 1) How do you calculate the carry in a FX swap (say 3m forward vs spot)?At time t0 parties exchange currencies At time t1 (in 3 months) parties receive 3m libor differential (in a perfect world) -> i(3m)* - i(3m)Now why is the carry received the 3m differential and not (3m differential - overnight differential) -> [i(3m)* - i(o/n)*] - [i(3m) - i(o/n)] ??After exchanging the currencies you should receive/pay rolling overnight and not only the forward discount/premium Am I making any sense?2) How would you then compute the mk2mkt p&l every end of day?Thanks in advance
 
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rickyvic
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Joined: February 25th, 2011, 4:56 pm

FX Swaps carry and mk2mkt question

December 2nd, 2011, 11:40 am

In fact 1) does not make senseWhat you rec/pay is the forward premium. Now deviation between interest differentials and forward premium must reflect counterparty risk and bidoffer in money markets.Periods of turmoil must be disruptive for the fair price.2) it should be first difference of forward premium * notional + forward premium * notional[d(F/S) + F/S] * N * (T-t) Now is anybody aware of the importance of counterparty risk?Is all the above correct?What can go wrong?