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yktsui
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Joined: November 2nd, 2010, 12:19 pm

Valuing Currency Forward ???

May 14th, 2013, 1:49 pm

Hi, I found from the CFA book that there is 2 version to calculate value of Currency Forward prior to expiration. Denote:S(t) : Spot rate at time t of domestic currency in terms of foreign currencyF(t,T) : Forward Price at time t of domestic currency in terms of foreign currency Expiring at time TR(dc) : annual interest rate of domestic currency R(fc) : annual interest rate of foreign currency For simplicity assume the Forward Expire in 1 year from Now (Now is at time t): <Version 1>Value = S(t)/(1+R(fc)) - F(0,1)/(1+R(dc))<Version 2>Value = (F(t,1)-F(0,1)) / (1+R(dc))It seems that the 2 formulas are not necessarily equivalent. Anyone have idea or come across on that? Or there is another formula for that?Thanks in advance.
Last edited by yktsui on May 13th, 2013, 10:00 pm, edited 1 time in total.
 
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daveangel
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Joined: October 20th, 2003, 4:05 pm

Valuing Currency Forward ???

May 14th, 2013, 2:38 pm

I imagine thatF(t,1) = S(t) * (1+R(fc))/(1+R(dc))
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yktsui
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Joined: November 2nd, 2010, 12:19 pm

Valuing Currency Forward ???

May 14th, 2013, 3:56 pm

QuoteOriginally posted by: daveangelI imagine thatF(t,1) = S(t) * (1+R(fc))/(1+R(dc))I see what you mean...I think F(t,1) should be S(t) * (1+R(dc))/(1+R(fc))Thanks very much.
Last edited by yktsui on May 13th, 2013, 10:00 pm, edited 1 time in total.
 
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Islacanela
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Joined: May 1st, 2015, 2:55 pm

Valuing Currency Forward ???

November 2nd, 2015, 5:10 pm

Dear all,What is the currency forward domestic rho? if I start with a value function [$]V = e^{-r_d(T-t)}(F-K)[$] and work it out[$]V = e^{-r_d(T-t)}(F-K) = e^{-r_d(T-t)} (S e^{(r_d-r_f)(T-t)}-K) = S e^{-r_f(T-t)}-K e^{-r_d(T-t)}[$].Then, the derivative with respect to [$]r_d[$] is[$]K (T-t) e^{-r_d(T-t)}[$]Is this the domestic rho for the a currency forward contract??
 
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Islacanela
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Valuing Currency Forward ???

November 3rd, 2015, 8:48 am

Is there perhaps a reference to the Currency (FX) forward Greeks?
 
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Islacanela
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Joined: May 1st, 2015, 2:55 pm

Valuing Currency Forward ???

November 3rd, 2015, 4:07 pm

I withdraw the question. I finally found the answer in David F. DeRosa Options on Foreign Exchange, which confirms that my derivations of the FX forward Greeks are correct.Thanks all anyway and sorry for posting this question in a few forums.
 
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Islacanela
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Re: Valuing Currency Forward ???

May 17th, 2017, 7:48 am

Dear all, what would be the difference between FX forward and FX futures pricing formulas, both in continuous and discrete time, non-constant (but non-stochastic) interest rates?

Is there also a good reference briefly explaining this issue?

Your answers would be greatly appreciated.
 
cfrm17
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Joined: March 14th, 2018, 5:52 pm

Re: Valuing Currency Forward ???

March 14th, 2018, 6:13 pm

Since you are asking for a reference, I think the paper may help (http://www.finpricing.com/lib/FxFuture.html).
In general, you can find the market price of an FX future every day from the Exchange. The pricing model should match that price and is primarily for generating Greeks.
 
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DavidJN
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Re: Valuing Currency Forward ???

March 17th, 2018, 6:01 pm

I didn't look at the reference provided by the previous poster, but a comparison of forwards and futures now needs to take into account whether the trade is collateralized. Collateral exchange makes a forward contract behave more like a future, although there is still a difference between the constant per tick payoff on a future and the present valued calculation on a forward.

Some of the CFA material has been behind the times. Can anyone confirm whether the advent of collateralization has made its way into the CFA reading materials?
 
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ppauper
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Re: Valuing Currency Forward ???

March 17th, 2018, 9:15 pm

DavidJN: could you please tell us which jurisdiction you are interested in?

the CFA curriculum is primarily aimed at the US market and I believe FX Products are not subject to IM/VM requirements under US  Margin Rules.
 
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DavidJN
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Re: Valuing Currency Forward ???

March 19th, 2018, 11:31 am

ppauper: I am not interested in any particular jurisdiction, just trying to throw some light on the poster's questions. So there is shade in America, imagine that!