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Given we know the

  • Notional
  • Trade Price
  • Currency in which the Bond Pays Coupons
  • FX Rate from Bond Currency to USD

Trying to understand if a Bond can have FX Delta Risk and how it should be computed?

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1 Answer 1

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Yes.

Assuming your reporting is in USD.

Assume that by "trade price" you mean "clean price", ex accrued. Most coupon bonds are quoted like that.

If you unwind the bond position today, settling T + some n, like 2 days, then the proceeds will be notional * (clean price + accrued coupon until the settlement date) in the currency of the bond on the settlement date. You can convert these foreign currency proceeds into USD in a separate transaction, using the spot exchange rate. Logically, this should just be the USD mark to market, but you may need some arbitrary bookkeeping to separate the principal from the accrued.

If, ceteris paribus, the exchange rate moves: the currency of the bond appreciates / depreciates versus USD, then the USD proceeds increases / decreases. This sensitivity is where the FX delta comes from.

If you conveniently define the FX delta to be the exposure scaled to 100%, then the FX delta is exactly the proceeds if you unwind now.

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  • $\begingroup$ Thanks @dmitri-vulis So simplifying, if I have a GBP Bond, it will be [Notional * (Clean Price) * FX Rate(GBP-> USD)] + [Notional * (Accrued Coupon until Today * FX Rate (GBP->USD)] ? $\endgroup$
    – godimedia
    Jun 30 at 15:32
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    $\begingroup$ I don't think you can trade any bonds T+0 yet. If you settle T+1, for example, then the coupon accrues until the next business day, not today. Note that EUR and GBP are quoted "cable" versus USD, unlike most other currencies. Note that if your desk defines FX delta not in terms of 100%, but eg 1%, then you need to scale to that. $\endgroup$ Jun 30 at 20:06
  • $\begingroup$ Yes, T+1 or 2 Depending on the Convention. Thanks a ton, that does it. $\endgroup$
    – godimedia
    Jul 1 at 13:06
  • $\begingroup$ Don't be surprised if some bonds still settle T+3. $\endgroup$ Jul 2 at 15:42

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