FX forwards
Table of Contents
This is the structure note for FX forwards. It orders the cluster and holds no content of its own.
1. Summary
Read the cluster from the definition outward. Covered interest parity fixes a forward, the market quotes it as points, and a ladder shows those points. Hedging, accounting and control then act on the result.
2. Detail
2.1. Definition and parity
- FX Forward defines the product.
- Covered Interest Parity and FX Forward Pricing states the relation that fixes its rate.
- An outright settles before, on or after the spot date places it by settlement date.
2.2. Quotation
- Forward points are the difference between the outright and spot states what is quoted, and Pip, tick size, and pip factor states the unit.
- Forward points follow from two money market rates shows how two rates give the points.
- Short-date swap points run between their own two value dates explains the short dates.
- Valuation spot date and overnight gives outrights before spot.
- A client's forward rate folds the sales margin into the all-in rate separates the market points from the margin.
2.3. Curves
- The US dollar is the natural hub for FX forward curves says why the dollar is the hub.
- An FX-implied curve is backed out from a discount curve and forward points runs parity in reverse.
- FX forward calculations run on discount factors and not quoted rates says what the calculation uses.
- Swap points and interest rate differentials are two views of one number links points and rates.
- ORE Studio publishes FX forwards derived from published curves says what ORE Studio does.
2.4. Display
- Forward Ladder defines the surface.
- A forward ladder can start from today, tomorrow or spot sets where a ladder starts.
- A forward ladder shows each pair's tenors as outrights and points lists what it shows.
2.5. Hedging, accounting and control
- A spot position is rolled forward with a tom-next swap carries a spot position.
- A dealer hedges an outright forward with a spot trade and an FX swap hedges an outright.
- A forward carries net fair value on balance sheet and its notional off it states the accounting.
- The regulatory treatment of an FX forward turns on settlement and purpose states the regulatory position.
- An end-of-day FX rate set must be complete and independently verified closes the day.
2.6. Variants
- A time option forward settles inside a window at one agreed rate lets the client choose the date inside a window.
- An NDF pays a cash difference on its settlement date settles a cash difference.
3. See also
- Currency pairs — completes: the companion hub for the pair as an entity.
- Interest Rate Curves — completes: the curves that a forward depends on.
- Zettelkasten — exemplifies: why this order is authored and not computed.