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I was wondering if someone can help me understand how to interpret the "annual yield" that is getting calculated below for NDFs. This is the way it's currently done in the place I work, but not intuitively understanding the formula for it (below).

Any advise would be very appreciated.

For the date to the left, they provide FX spot, Bid and Ask (in outright terms) and arrive to the annual yield (in red), which I don't comprehend conceptually.

enter image description here

Formula used for Annual yield = Annual * (Pips spread / FX spot)

Thank you

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  • $\begingroup$ I've seen a few NDF setups, but never this calculation, must be unique to your desk :) What's the "annual" (3rd column, 12 and 6)? $\endgroup$ Jun 17 at 13:25
  • $\begingroup$ @DimitriVulis Hi. It's doing = 12 / months in the tenor --> so for second row, 12 / 6 = 2 $\endgroup$
    – F0l0w
    Jun 17 at 13:31
  • $\begingroup$ I haven't seen this before - normally 'yield' would be the implied yield (for COP) calculated using spot, points and the USD depo rate. There was/is an old presentation from Reuters online that shows how to do this. $\endgroup$
    – user42108
    Jun 17 at 13:32
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I have never seen this particular formula either but I have seen something similar being used frequently.

Hedge costs are computed as $$(Fwd\ Pts/Spot)/100 $$ and annualized (usually with exact days though, like ACT/360 or ACT/365).

E.g. if

  • fwd pts = 50
  • spot = 110
  • days = 91 (for 3m and daycount subject to convention ) $$ (50/110)/100 = 0.45455 \% $$ $$0.45455\%/(91/360) = 1.7820\% $$

This is what you will find on ALLX FXHC<GO> in case you have access to a Bloomberg terminal (tickers like FXHCUSJP Index for USDJPY 3m hedge cost)

Note that $1/(30/360)=12$ so it is essentially identical in your formula (annualization).

Now, not thinking of it in terms of cost, but how much spread you charge, you can use a similar argument I guess.

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    $\begingroup$ Thank you for sharing $\endgroup$
    – F0l0w
    Jun 18 at 1:14

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