FX forward calculations run on discount factors and not quoted rates
Table of Contents
1. Summary
Pricing libraries compute an FX forward from a ratio of discount factors. The ratio needs dates and curves, and no day count or compounding convention.
2. Detail
Rate quotes carry a compounding and day-count convention. A discount factor does not, because it is the present value of one unit. Two curves on different conventions, such as ACT/360 and ACT/365, therefore combine directly.
3. See also
- FX forwards — the structure note.
- Interest Rate Curves — completes: how the curves hold discount factors.
- ORE Studio publishes FX forwards derived from published curves — exemplifies: forwards built this way.
- Forward points follow from two money market rates — contradicts: the money market form does need each day-count basis.