As an example: Trade date: 1/1/16 Maturity date: 2/29/16 Settlement (exchange of currencies) 3/31/16

Is the instrument between 2/29 and 3/31 still deemed a forward? The forward rate is determined so that the fair value is zero at 1/1/16 with expiry date 2/29/16.

Edit (2/7/16): Would the answer be different for the following cases:

  1. Forward is gross settled - i.e. two cash flows occur, each in their respective currencies
  2. Forward is net settled - only one cash flow occurs in USD determined as gain or loss on maturity using 2/19 fx rates. The cash flow itself occurs on 3/31.

This is a non standard instrument. In most cases maturity date = settlement date otherwise, yes, you get this 1 month of interest between the forward maturity date used for the interest rate calculations to get the price of the forward, and thus the cash amounts required for settlement. Then you get 1 month waiting to settle those cash amounts. So there's another implied forward due to NPV of the cash amounts during that month according to the 1 month interest rates until the maturity date cash amounts become due on the settlement date...

I don't really understand why such an instrument would exist, but it is a kind of implied forward.

  • $\begingroup$ Thanks, this is helpful. I can see this being the case if this is a gross settled forward. What do you think the implications are if it is a net settled forward in USD, the domestic currency of the entity entering into the forward with a bank. $\endgroup$ – PBD10017 Feb 6 '16 at 22:22
  • $\begingroup$ I don't think how or in which currency the cash flows are satisfied makes any difference unless you need a particular currency for an underlying business requirement, like paying a bill to the bought currency country. The amounts of each cash flow come from the interest rate differentials which ought to be non arbitrageable. The 2 cash flows can then be converted to 1 risk currency, like an NDF converted to USD, or stay as 2 cash flows, whatever you need. $\endgroup$ – rupweb Feb 8 '16 at 18:09
  • $\begingroup$ However, in your edit 2, there is that implied forward adjustment depending again on the interest rate differentials between the 2 currencies. Have a look at my FX and MM training $\endgroup$ – rupweb Feb 8 '16 at 18:11

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