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Questions tagged [forward]

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2
votes
0answers
26 views

Retrieve zero coupon curve from forwards

Let's suppose I am given a forward swap curve of a certain maturity (10Y). The curve is not very smooth and is decreasing but whatever. I have the curve : $S(0,t,t+T) = \frac{P(0,t) - P(0,t+T)}{\sum_{...
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1answer
61 views

What is the difference between Cost of Currency Hedging and the Price of a Currency Pair Forward?

I am looking at Reuters Datastream and all they seem to provide is the settlement price of the CME EURGBP contract (which more or less equals current spot). But what does it actually cost me to ...
9
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1answer
2k views

How to calculate the CVA of a forward contract?

I am having trouble calculating the CVA of a forward contract. The question is presented below Question: There exists a long forwards position underlying on gold with 2 years remaining. The ...
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3answers
801 views

Calculating FRA rates

Let's assume I constructed usd libor 3M curve setting 1M rate=3M rate (so the curve is flat between 1M-3M). Will 1x4 FRA rates be good if calculated from such curve?
1
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1answer
109 views

What happened to future price if rates become negative?

Imagine the spot price of a non deliverable and not paying dividend asset is 100\$. With positive rate, the theoretical formula $F = S \cdot e^{rT}$ give us a future price higher, let's say 105. If ...
0
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2answers
1k views

Why a Target Redemption Forward cannot be used as hedging instrument?

A Target Redemption Forward (TARF) allows you to buy or sell foreign currency at an agreed “Enhanced Rate” for a number of expiry dates. But why can't a Target Redemption Forward (TARF) be used as a ...
0
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2answers
41 views

Calculating bond forward rate/price

What's the difference these two methods on calculating the bond forward rate/price. First of all I'm assuming forward rate is the same as forward price in this context, if this assumption is false, ...
3
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5answers
135 views

Equity Forward Price calculation

In the book of John Hull, the price of an equity forward on a dividend paying stock is formulated as: $$F_0 = (S_0 - I)e^{rT} $$ where $r$ is the risk free rate and $I$ is present value of the stream ...
4
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0answers
2k views

Carry Trade vs synthetic Carry Trade using forward contracts

When it comes to foreign exchange carry trade strategy, the definition is straightforward: an investor borrows 1 US-\$ in the US (low interest country) and invests that \$1 to AU (high interest ...
3
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1answer
15k views

Formula for forward price of bond

What is the formula for the forward price of a bond (assuming there are coupons in the interim period, and that the deal is collateralised) Please also prove it with an arbitrage cashflow scenario ...
3
votes
2answers
125 views

Interest rates impact on forward prices

In stock option markets, rising interest rates will increase the froward price, causing call values to rise and put values to fall. But my understanding is that rising interest rate will cause stock ...
2
votes
1answer
39 views

Units of measurement for Minimum Variance Hedge Ratio

The minimum variance hedge ratio is given by $h=p*\frac{\sigma_S}{\sigma_F}$. I was wondering if you wanted to calculate the S.D yourself and the spot prices were in Dollars per barrel while futures ...
2
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0answers
30 views

Dimension reduction for worst of basket on $min(S_1, S_2)$

Suppose we want to price an exotic equity which is a function of $min(S_1, S_2)$. To do this, I'm trying to compute an implied volatility surface for $min(S_1, S_2)$ and then price the option using ...
5
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2answers
5k views

How to derive Black's formula for the valuation of an option on a future?

I've got a question about 1976 Black Model and Bachelier model. I know that a geometric brownian motion in the P measure $dS_{t}=\mu S_{t}dt+\sigma S_{t} dW_{t}^{P}$ for a stock price $S_{t}$ leads (...
0
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0answers
31 views

Negative drift when calibrating GBM parameters

Setup for question: Consider a basket of $N$ stocks $\{S^1, S^2, \dots, S^N\}$. For fixed strike $K$, each stock in the basket, $S^i$, follows the SDE $$dS_t^i = \mu^i(t) S_t^i dt + \sigma^i(K, t) ...
1
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1answer
789 views

Pricing Uneven FX Swaps

I'm trying to figure out how to price uneven FX swaps. I just started on a FX trading desk and have been told that the all-in rate for a 2-legged FX swap is equal to: 1) Quote for market side of net ...
4
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0answers
65 views

Replication of a dividend swap

I wanted to know how banks replicate dividend swap, my best guess is to take the spread between a Total Return Swap and a Forward.
0
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2answers
452 views

Futures and Forward Prices vs interest rates

Textbooks usually state that if an asset's prices are positively correlated with interest rate movements, then its Futures price is going to be greater than its Forward Price assuming the same ...
2
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2answers
641 views

Why AREN'T forward rates what the market expects of the spot rates?

I know that for a swap for example, the swap rate is just what adopts equilibrium for both legs by no arbitrage, on the other hand for a FRA its just the same only with one period of time. Considering ...
1
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1answer
43 views

FX Forward last day first day premium

How exactly do you trade the turn of the year/quarter effect (also known as last day-first day effect). How do you track this data, is it directly quoted in the market or is it interpolated?
1
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1answer
51 views

Basic FX-Forwards trading Guide [closed]

What fundamentals or other factors should one follow to trade currency Forwards intraday?
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0answers
77 views

Constructing USD 1M Libor Forward Curve

Hope you are doing fine. I am pricing a 1month IRS. For that purpose in order tu build the forward curve i have to use the following. Since USD 1m instruments do not exist, one has to use basis ...
1
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1answer
153 views

Constructing an FX forward curve

A lot of our clients are currently using interest rate parity as a means of constructing an FX forward curve. For instance, to construct the USD-GBP FX Forward curve, they are using the USD LIBOR, ...
2
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2answers
193 views

Forward Volatility vs Spot Volatility in Option Skew Models

My question is regarding Volatility Skew Models and their inputs. I have noticed that a vast majority of models take as an input the forward of the underlying (even in the case of stocks - where the ...
0
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2answers
193 views

Why are FRA/futures convexity adjustments necessary?

This would be my explanation for the reason that convexity adjustments must exist: Futures are margined daily, such that if a trader is paid a future and rates goes up then money is paid into their ...
1
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2answers
86 views

Gold forward price

In the Hull book, i saw the following exercice and its answer : Suppose the one-year gold lease rate is 1,5% and the one-year risk-free rate is 5%. Both rates are compounded annually. Calculate the ...
2
votes
1answer
74 views

Computing FX forward returns using spot returns and an existing term structure

Sorry for the naive question, I am new to the area. I have YTD spot returns on the USD/GBP pair and a forward yield curve. How would one go about computing the forward returns in 2 years using this ...
1
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2answers
75 views

Strategy if dividend is lower than expected

Here is a question I encountered: In 2009, a trader believes that dividends for a stock in 2011 will be lower than expected, what is the best strategy among: long/short 2010 forward, long/short ...
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0answers
76 views

How can we value NPV for a standard FX Swap?

hope you are all well! Was just wondering how we can value the NPV on the value date for a FX swap - i'm sure it's by evaluating the interest rate payable/receivable from the trade date until the ...
3
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2answers
2k views

Price a forward contract on a zero-coupon bond

I'm trying to calculate the price of a forward contract on a zero-coupon bond (ZCB). The forward contract matures at $t_1$ and the ZCB matures at $t_2$. So is the price of the forwards contract just ...
7
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1answer
136 views

Principal Components Analysis on overlapping contracts

I am conducting several PCAs on the gas forward curves (months, quarters, seasons, calendars) for hedging purposes which give me some rather reasonable and stable results. However, these contracts ...
0
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0answers
77 views

value of forward contract at inception

I am reading a derivation of the forward price $F$ of a forward contract. I think the author uses a circular argument to assume that "the value of the forward at inception is equal to 0" because the ...
3
votes
1answer
88 views

Pricing an Asian style forward contract with early exercise feature

Is there an analytic way to price or approximate a contract with payout $A_t - K$, where $A_t$ is the running average price of the underlying asset from $[0, t]$ and $K$ is (fixed) strike. If this ...
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0answers
53 views

FX Average Forward Pricing

Lookin for documentation on how to price FX Arithmetic Average Rate Forwards. Couldn't find any info on textbooks. Any help is very appreciated.
2
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2answers
1k views

“Forward price of bond” VS “Price of a bond with a future settlement date”

What is the difference between 1) computing the 'forward price' of a bond at a future time T. ( spot price - carry, involving repo rates) 2) computing the price of a bond (discounting all cash ...
0
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2answers
193 views

Stock forward price argument

Hi I am strangling to understand where is the mistake with the following strategy. Can anyone help me with the following argument? Assuming a stock price follows geometric Brownian motion then the ...
2
votes
3answers
511 views

how to simulate FX forwards

My question is how to do Monte Carlo simulation for FX forward contracts. Just imagine you have bought a bunch of FX forwards (in various currencies and various tenors) for hedging purposes and you ...
0
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2answers
167 views

How to calculate correlation between commodities with forward prices?

I'm trying to understand which is the correct way to calculate the correlation between 2 commodities with forward prices. My idea would be first bootstrap forward prices to have only spot prices for ...
3
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2answers
1k views

How to calculate this swap rate

What is the 2x5 swap rate? here 2x5 swap rate refers to the 3-year swap, 2 years forward.
14
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2answers
689 views

Implied term structure from risky discount curve: does it make sense?

We know that, taken every discount curve, it's possible to calculate its forward rates according to our tenor preferences. We know also that it's actually possible to extract an implied term ...
5
votes
1answer
1k views

How does the 2-factor Hull White model propagate the forward rates curve?

I've been trying to get a grasp on some of the basics of interest rate modeling, and am looking to simulate rates using the 2 factor Hull White model, which I am aware offers a more realistic model of ...
1
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1answer
188 views

Why are interest rate swaps the most popular interest rate derivatives [closed]

Interest rate swaps are the most popular interest rate derivatives. Is there a reason why they are more popular than other interest rate derivatives (e.g. forwards, futures)? Is it because they were ...
1
vote
1answer
134 views

What is the instantaneous FX rate and used for a FX Forward?

Could someone please explain me what the instantaneous FX rate corresponds to and why it is used in the valuation of an FX Forward trade? It is defined as: FX_Instantaneous= FX_Spot-(ON+TN) where ...
0
votes
1answer
154 views

Difference between settlement of Eurodollars and FRA

I am going through J.C. Hull's chapter on FRA and EuroDollar Futures. Taking the case of FRA. I assume $T_0$ is the time when two parties entered into a FRA to fix interest rates they get on a ...
1
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1answer
111 views

When to Choose FX Swap or Forward

Assume we have an exporter who is looking to hedge their USD exposure. How would they decide between choosing a FX swap or a FX forward contract to do so? I understand that a swap has 2 exchanges, ...
1
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0answers
194 views

Forward implied vol vs Instantaneous vol

In the Discrete Stochastic Implied Volatility Model which is from the standard Heston Model, the model shows the evolution of forward implied volatilities with time. I thought forward implied ...
5
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2answers
785 views

Valuation of open FX-Forward

So called closed FX-Forwards are well known forward contracts where some amount of foreign currency is bought at a specified date in the future for a price fixed "today". Such contracts can be ...
7
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1answer
4k views

Convexity Adjustment for Futures

Let $B_t$ be the cash account numeraire. The future and forward prices at time t are expressed as: $$ Fut = E_t^Q\left[S_T\right],$$ $$ Fwd = \frac{E_t^Q[S_T/B_T]}{E_t^Q[1/B_T]}.$$ Where $$ \frac{...
1
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0answers
226 views

Quanto Factor - FX Forward

In the paper Quanto Options by Uwe Wystup the "quanto factor" $Q$ is used to describe forwards/options when quanto-ed into a different currency, e.g. $$\text{Quanto Forward Value} = Q \cdot e^{-r_Q T}...
2
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0answers
161 views

Extrapolating implied dividend yield

I have liquid option quotes for 1, 2, 3 and 4y expiries. I was able to imply the continuous dividend yield for all of those. How would you extrapolate such implied yield to 5 and 6y expiries?