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I might be asking a very simple question for the FX experts...

I would like to check the HistSim VaR process for a currency NDF.

Given the PV for the product is defined as:- (f(T) - K)*discFactor(DOM,T)*N

f is the forward outright for the NDF ccy pair
k is the strike
T is the maturity
discFactor(DOM,T) is the domestic discount factor
N is the foreign ccy

This can be re-written as = (Spot + Swap_point(T) - k)* discFactor(DOM,T)

Am I then right in saying that the risk_factors are:- 1) Spot 2) the forward fxSwap point 3) domestic risk-free rate ?

For VaR, I will also need the correlation between each of these risk-factor changes

Also, for USDCNY where base = USD, I am guessing I need to switch from Base=USD to Base=CNY

Thanks.

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  • $\begingroup$ Also would like to refer to the post:- quant.stackexchange.com/questions/12617/… where , we have a long exposure to EUR Spot (as per Jorion's method). Is that exposure true for cash settled NDFs as well? $\endgroup$
    – sumit_uk1
    Jan 5, 2017 at 14:53

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The risk factors for NDF are the same as for vanilla FX forward. The thing about an NDF is that all that changes hands on value date is a cash flow calculated according to the difference in rates since trade date, usually in USD. That means that you can "trade" the instrument offshore and you don't have to comply with onshore trading regulations...

Looks like Matt Wolf already answered the question about risk factors for FX forwards here

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