3. outright forwards international financial services 1 karel bruna
Post on 28-Dec-2015
217 Views
Preview:
TRANSCRIPT
3. Outright forwards
International Financial Services 1
Karel Bruna
Main Business Problems(outright forwards)
• Company and FX exposure based on simple transaction (static example)
• Outright forward as the main instrument how to lower FX exposure
• Pricing mechanism of outright forwards
• Pros and cons of outright forwards
Main Characteristics of Outright Forwards
Maturity: 1M, 2M, 3M, 6M, 9M, 12M + odd dates
Price: bid/ask forward rate (FR)
Currency pairs: as in case of spot contracts
Amount: minimum defined by the market maker
Interest Rates: interbank deposit/lending rates
yields of treasury instruments
Time conventions: act/360 or act/365
Forward Rate Quotation
Forward Rate Calculation and Quotation(outright quotation)
1 + IRUSD,D(t/360)FRBID(USD/EUR) = SRBID(USD/EUR) . ---------------------------
1 + IREUR,L(t/360)
1 + IRUSD,L(t/360)FRASK(USD/EUR) = SRASK(USD/EUR) . ---------------------------
1 + IREUR,D(t/360)
Forward Rate Calculation and QuotationExample of high points/low points quotation
spot rate quotation: BID ASK
SR (USD/EUR) 1,2393 1,2396money market quotation:
D L1M IREUR (% p.a.) 2,03 2,051M IRUSD (% p.a.) 1,08 1,11
outright forward rate calculation: 1 + IRUSD,D(t/360) 1 + 0,0108(30/360)FRBID = SRBID .---------------------- = 1,2393 .------------------------ = 1,2383USD/EUR
1 + IREUR,L(t/360) 1 + 0,0205(30/360) 1 + IRUSD,L(t/360) 1 + 0,0111(30/360)FRASK = SRASK .----------------------- = 1,2396 .------------------------ = 1,2387USD/EUR
1 + IREUR,D(t/360) 1 + 0,0203(30/360)
Forward Rate Calculation and Quotation(quotation in forward or swap points)
BID points:
(FRBID - SRBID) . 1000
(FRBID - SRBID) . 10000
ASK points:
(FRASK - SRASK) . 1000
(FRASK - SRASK) . 10000
Forward Rate Calculation and QuotationExample of high points/low points quotation
forward (swap) points calculation:
(FRBID - SRBID) . 10000 = (1,2383 - 1,2393) . 10000 = - 10 points(FRASK - SRASK) . 10000 = (1,2387 - 1,2396) . 10000 = - 9 points
outright forward quotation: BID ASK
FR (USD/EUR) 1,2383 1,2387forward (swap) points quotation:
USD/EUR 10/9spot exchange rate spread:(SRASK - SRBID) . 10000 = (1,2396 - 1,2393) . 10000 = 3 points
forward rate spread:(FRASK - FRBID) . 10000 = (1,2387 - 1,2383) . 10000 = 4 points
Forward Rate Calculation and Quotation
FR > SR base currency is at premium and quoted currency is at discount quoted as low points/high points
FRBID = SRBID + low pointsFRASK = SRASK + high points
FR < SR base currency is at discount and quoted currency is at premium
quoted as high points/low points
FRBID = SRBID - high pointsFRASK = SRASK - low points
Pricing Mechanism of Outright Forwards
• forward rate of standard forward contract
• implied forward rate of synthetic forward contract
Pros and cons of outright forwards
Arguments for outright forwards:
• Main instrument for FX exposure management
• Easy and cheap way how to obtain fixed exchange rate
• Possibility how to lower volatility of cash-flow
Arguments against outright forwards:
• Suitable only for transactions with known amount and maturity
• Suitable only for static examples of FX exposure
top related