Good day
I would like to double check that I have this formula correct for the pricing of an equity forward in a different currency.
S = Equity spot in USD
f = Equity fwd in USD = Se^rt
FXS = USDZAR spot (base is USD)
FXf = USDZAR fwd = FXS x (1 + ZAR rates x t) / (1 + USD rates x t)
f* = Equity fwd in ZAR = f x FXf
Essentially, the equity fwd in ZAR is equal to the equity forward in USD multiplied by the USDZAR currency fwd.
Thanks!
Serving the Quantitative Finance Community
Re: Pricing an equity forward in a different currency
I'm trying to understand your question first; what exactly are you trying to do:
1. Find the payoff/value of a vanilla forward in a different currency?
2. Value a quanto forward?
3. Value a compo forward?
1. Find the payoff/value of a vanilla forward in a different currency?
2. Value a quanto forward?
3. Value a compo forward?
Re: Pricing an equity forward in a different currency
It might be necessary to specify Equity notion. For me Equity for example is a stock. Why does the spot price of the equity is grow exponentially ?
f = Equity fwd in USD = [$]S e^{rt}[$]
f = Equity fwd in USD = [$]S e^{rt}[$]
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- aveshenpillay
- Posts: 4
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Re: Pricing an equity forward in a different currency
Frolloos - I am trying to solve question 3) - value of a compl fwd
list1 - the equity here is an index and r = interest - dividends; I chose continuous compounding to work out the value of the index equity forward. I could do discreet, but thought that this way would be simpler
list1 - the equity here is an index and r = interest - dividends; I chose continuous compounding to work out the value of the index equity forward. I could do discreet, but thought that this way would be simpler
Re: Pricing an equity forward in a different currency
Okay, a compo forward pays out [$] X_T S_T - K [$] at maturity, where [$] S [$] is the USD index, [$] X [$] the price of a USD asset in ZAR, and [$] K [$] the forward strike in ZAR. To make the strike fair just take the risk-neutral expectation (in the ZAR economy) of [$] X_T S_T [$]. And you can do that because [$] XS [$] is a tradeable asset in ZAR.
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- aveshenpillay
- Posts: 4
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Re: Pricing an equity forward in a different currency
Thank you so much frolloos - much appreciated
Re: Pricing an equity forward in a different currency
It seems two risk neutral rates can be defined for the contract. One is SA government bond rate other which is image of the US rate in ZAR. Whether they are equal assuming that both rates are risk free.
Re: Pricing an equity forward in a different currency
Actually, I think it was Captain Jack who did it.It seems two risk neutral rates can be defined for the contract. One is SA government bond rate other which is image of the US rate in ZAR. Whether they are equal assuming that both rates are risk free.
Re: Pricing an equity forward in a different currency
frollos, the question was about the risk free rate in SA and not who did it. The same question can be asked about Argentina or Philippin for example.
Re: Pricing an equity forward in a different currency
You posted three sentences that made no sense - in particular the reference to "risk neutral rates".frollos, the question was about the risk free rate in SA and not who did it. The same question can be asked about Argentina or Philippin for example.
-- Just a little push, and you'll be smiling
Re: Pricing an equity forward in a different currency
Bearish, you right about pre-previous message. It can happen time to time. For example in you attached my message to which one supposes you provide the following comment there only two sentences without "risk neutral rates" and I could not find a spot to smile.