1
$\begingroup$

Let's assume I am buying a NZD/USD 1Y forward for $1000000 on the 20/02/2017. The NZD/USD 1Y forward point is currently -270 and spot rate is 0.8325. (Example taken from here).

Now I want to have a price return for this at asset at 21/02/2017, 22/02/2017 etc. The 1Y FX forward becomes a 1Y - 1 day, 1Y - 2 days FX forward etc. which are not quoted. So they have to be estimated.

I do have access to the new 1Y FX forward rate on all of those future dates and I also have access to the 6M FX forward rate, 2-Y FX forward rate etc.

How do I create an estimated price series?

$\endgroup$
  • 1
    $\begingroup$ And do you have access to the spot rate? To interest rates in the two countries? $\endgroup$ – noob2 Sep 11 '17 at 21:56
  • 1
    $\begingroup$ Yes I have access to the spot rate. $\endgroup$ – Joachim Sep 11 '17 at 21:56
1
$\begingroup$

Here is an approximate formula requiring no other inputs. Suppose:

$S_0$ = initial spot rate

$F = S_0 + d$ agreed forward exchange rate, where d is the number of forward points

$T$ maturity date of forward

you can calculate an approximate mark-to-market price for the forward on date $t$ $ (0\le t \le T)$ as follows:

$P_t = S_t - (S_0 +d \frac{t}{T})$

Note the following:

$P_0 = 0$. At the moment you enter into the forward agreement you could get out of it with no profit or loss (except perhaps a transaction cost)

$P_T = S_T - F$. This is what textbooks say a forward is worth at maturity. You have made money if the spot rate is above the initially contracted forward rate and have lost money in the opposite case.

When $0<t<T$ the formula gives a linearly interpolated value. This is where the approximation comes in, it is not strictly true, because of interest compounding and for other reasons, but may be close enough for a forward having a maturity of 1 year or less.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.