Calculating Forward prices

trader1011 · September 10th, 2008, 4:53 pm

Hi GuysFirst of all, thank you all for making this forum so lively and helpful. It is very helpful.Recently, I came across couple of questions regarding Forward prices. 1). Given a spot FX rate and Interest rate of two currency pairs, what is the expected forward FX rate?2). Given a spot bond price, coupon and funding rate, what is the forward price?Thanks in advance.....

dpm25 · September 11th, 2008, 12:19 am

errm, is this for real ?Might I suggest Hull, chapter 1 page 1 equation (1.1) as a good starting point ?F = S * exp { (r - f) * T} where r and f are domestic and foregin risk free rates (or, if you like risk free and income rates) annualised and continuously compounded, T is tenor of forward contract in years and S is spot. Other forms apply for non-continuous rates

daveangel · September 11th, 2008, 5:46 am

to be fair question 2 is a bit trickier.2) first calcultae the yield on the bond. then discount all cash flows from the bond beyond the maturity of the forward to today using the yield. then forward the PV to the maturity of the forward using your funding rate. subtract the accrued interest (the interest that will accrue from the coupon prior to the maturity of the forward to the forward).

trader1011 · September 14th, 2008, 1:55 am

Both replies were quite helpful. Thanks Dave and and dpm25.......

daveangel · September 15th, 2008, 7:31 am

Quite ?