9
$\begingroup$

This is not homework. I am trying to calculate the implied interest rate of one currency (C2) using an FX swap and the interest rate of another currency (C1 - base). I have the following:

Spot: 7.7587 (C2 per unit C1)
Buy Notional (spot) C1: 12,888,757.14
Sell Notional (spot) C2: 100,000,000.00

Start date: 6-May-13
End date: 7-May-14

Buy Notional (forward) C2: 100,000,000.00
Sell Notional (forward) C1: 12,905,390,58
Forward FX rate: 7.7487

I have a borrowing in C1 for 0.9650% for the year.
Using interest rate parity: $$ F_0 = S_0 \frac{1+r_{C2}}{1+r_{C1}} $$
I solve for $ r_{C2} = 0.8349\%$.
However, I am told that the right answer is $0.8486\%$.
Which should be the implied interest rate in currency C1. Am I crazy or missing something?

Do I need to consider FX basis?

EDIT
If I use ACT/360 for C1 and ACT/365 for C2 with $ACT=365$ I get actually pretty close $(0.8483\%)$. Is that it? Is the difference caused by daycount?

C1 is USD
C2 is HKD
(I believe these are the correct day-count convention based on a paper by UBS). Not sure where to find the "official" declaration.

Improve this question
$\endgroup$
2
  • $\begingroup$ well, its impossible to say if you dont tell us which day count conventions must be applied. The question, wherever it is coming from should make a mention of that. $\endgroup$
    – Matt Wolf
    Jun 28, 2013 at 4:44
  • $\begingroup$ Apologies. I clarified the currencies in the edit. $\endgroup$
    – PBD10017
    Jun 28, 2013 at 5:41

1 Answer 1

Reset to default
9
$\begingroup$

Because the day count of your inquired date is 366 days:

  • Hkd daycount is act/365 therefore 366/365
  • Usd daycount is act/360 therefore 366/360

$$ \frac{7.7487}{7.7587} = \frac{1+r_2(\frac{366}{365})}{1+0.00965×\frac{366}{360}} $$

Solving for $r_2 = 0.8486$.

Improve this answer
$\endgroup$
1
  • $\begingroup$ Awesome! How did you find out the conventions? Thanks. $\endgroup$
    – PBD10017
    Nov 11, 2013 at 5:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

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