FX Forward

ORE defines the product as follows:

An Fx Forward is a contract that locks in the FX rate for the exchange of a set amount of one currency for another at a predetermined time in the future. An Fx Forward does not involve any upfront payment.

Source: ORE User Guide, Products catalogue, fxforward.tex.

Two parties agree to swap currencies on a future date. The rate is fixed today. Neither party pays anything now. On the agreed date they exchange the agreed amounts, or the difference in cash. The deal removes the uncertainty of what the rate will be later.

The FxForwardData node names the two sides of the exchange:

• BoughtCurrency and BoughtAmount. What the holder buys on the value date.
• SoldCurrency and SoldAmount. What the holder sells in return.
• ValueDate. The exchange happens on this date. The agreed rate applies then.
• Settlement. Physical delivers both currencies. Cash settles the difference in one currency. ORE represents a non-deliverable forward as a cash-settled forward.
• SettlementData. The settlement currency, the FX fixing index, and the payment date. These apply when settlement is cash.

The value date follows the FX spot date conventions of the pair. Restricted currencies use the non-deliverable form. Only the difference changes hands there.

The forward rate derives from the spot rate and the interest-rate differential of the two currencies. The relation is covered interest parity. The difference between forward and spot is the forward points. They shrink as the value date approaches. A forward is a linear product. Its value is proportional to the move in the underlying FX rate, with no optionality.

• Spot FX. The dominant driver. The value changes nearly one-for-one with the spot move, scaled by the amounts.
• Interest rates. They act through the forward points. A rise in the bought currency's rates, relative to the sold currency's, moves the value in the opposite direction.
• Settlement conventions. Cash settlement adds a small sensitivity to the fixing index and the settlement date.

The sign of the sensitivity depends on which currency is bought. A holder buying EUR against USD gains when EUR strengthens.

Between trade date and value date the contract value fluctuates with the market. ORE's own words:

Before the ValueDate, the FxForward contract's value fluctuates with market FX rates. At the ValueDate, the settlement becomes deterministic.

Source: ORE User Guide, Products catalogue, fxforward.tex.

After the value date, no market risk remains. Only the settlement and any payment-lag exposure are left.

A corporate that will pay or receive foreign currency locks the rate now and removes budget uncertainty. A bank hedges its own currency positions or quotes forwards to clients. A cash-settled forward gives the same hedge where the currency cannot be delivered, or where the client must not hold it. Arbitrageurs trade the forward against spot and deposits when covered interest parity breaks.

ORE's own catalogue shows the trade data node:

<FxForwardData>
    <ValueDate>2023-04-09</ValueDate>
    <BoughtCurrency>EUR</BoughtCurrency>
    <BoughtAmount>1000000</BoughtAmount>
    <SoldCurrency>USD</SoldCurrency>
    <SoldAmount>1500000</SoldAmount>
    <Settlement>Physical</Settlement>
</FxForwardData>

Source: ORE User Guide, Products catalogue, fxforward.tex, listing FX Forward data (settlement details omitted).

A cash-settled forward example sits in the ORE trade corpus at assets/test_data/golden_dataset/Products/Example_Trades/FX_Forward.xml. Native ORE example portfolios with FX forwards sit under external/ore/examples/Exposure/Input/portfolio_fx.xml.