how do we get the forward curve on currency, and how far out does it go?
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Forward Curve on Currency question
- Thread starter FastandFurious
- Start date
Quote from rosy2:
you can get the prices for FX futures and plot them against expiration dates.
thank you for the reply, can you elaborate that? From what I've read, there are arb uses, and the common rate is the LIBOR? What uses does the currency curve have? I'm just trying to put everything together. Thanks!
i'm new to the forward curves, anyone able to explain?
Quote from xflat2186:
If you had access to the interbank market you could get a forward priced to any date you like. The value is a simple calculation based on spot plus / minus the carry to that date. Futures are just standardized forwards.
thank you for the response, I'm just learning this so please excuse my ignorance.
what are the standard months? I am specifically interested in currency forwards and in my research I see typical 1 month, 3 month, and something to do with LIBOR. What are some typical applications of forwards in terms of arb, hedge?
anyone else?
Standardized contracts ie. Futures are on the quarters of each year MAR, JUN, SEP and DEC. Forwards on the other hand can be priced to any day you want. Obviously the further out in time you go the wider the market in the forward.
Just as an example if you wanted a 60 day forward in something like USD/YEN you would use spot USD/YEN and then calculate the swap based on the appropriate rate for each currency over that time.
OTC Currency options, which is the largest market in the world for currency options are not standardized in terms of contract specs. You can trade for expiration/settlement for any non weekend/holiday date. In order to correctly hedge the delta and rho of those options you'll need to do a currency swap or forward otu to that settlement date.
Not sure exactly what you're looking for but if you ask a specific questions I'llbe happy to help you with it.
Just as an example if you wanted a 60 day forward in something like USD/YEN you would use spot USD/YEN and then calculate the swap based on the appropriate rate for each currency over that time.
OTC Currency options, which is the largest market in the world for currency options are not standardized in terms of contract specs. You can trade for expiration/settlement for any non weekend/holiday date. In order to correctly hedge the delta and rho of those options you'll need to do a currency swap or forward otu to that settlement date.
Not sure exactly what you're looking for but if you ask a specific questions I'llbe happy to help you with it.
Quote from xflat2186:
Standardized contracts ie. Futures are on the quarters of each year MAR, JUN, SEP and DEC. Forwards on the other hand can be priced to any day you want. Obviously the further out in time you go the wider the market in the forward.
Just as an example if you wanted a 60 day forward in something like USD/YEN you would use spot USD/YEN and then calculate the swap based on the appropriate rate for each currency over that time.
OTC Currency options, which is the largest market in the world for currency options are not standardized in terms of contract specs. You can trade for expiration/settlement for any non weekend/holiday date. In order to correctly hedge the delta and rho of those options you'll need to do a currency swap or forward otu to that settlement date.
Not sure exactly what you're looking for but if you ask a specific questions I'llbe happy to help you with it.
thank you xflat for you response. I'm just learning about forwards and the answer may be more basic than what it seems. I'm just trying to find out how do we get the forward curve for currencies and how far out does it go to.
so far I came up with this.
A forward curve is a graph of forward prices for various maturities. The value of a forward is a simple calculation based on the spot market and the cost of carry to the date. I can get the prices for FX futures and plot them against expiration dates. Swaps usually extends to 10 years, and some swaps need to be priced accordingly for which no delivery dates exist in futures or cash markets. For instance, pricing a 12 year interest rate swap on LIBOR will be difficult as futures contracts on USD and LIBOR currently goes to 10 years, and the Eurodollar is mostly short term.
The forward curve for currencies has NO standardized dates. Therefore if you asked for a market in a swap, you could in theory chose any date you like out in the future so long as that date is not a weekend or a banking holiday in one the currencies in the swap. Forget the futures, since we've established they only settle on the quarters and they dont go out to great distance in time.
Think about it like this, if you wanted a 10 yr swap in dollar/yen you'd be forced to use the 10 year govt rate for each currency to calculate the swap. If the date you're interested in does not settle when the 10 year govt paper does then you interpolate based on the closest standardized paper.
Swap/Forwards/Futures all decay over time dont forget. As the settlement date for that swap draws closer the spread between the swap and spot will converge.
Think about it like this, if you wanted a 10 yr swap in dollar/yen you'd be forced to use the 10 year govt rate for each currency to calculate the swap. If the date you're interested in does not settle when the 10 year govt paper does then you interpolate based on the closest standardized paper.
Swap/Forwards/Futures all decay over time dont forget. As the settlement date for that swap draws closer the spread between the swap and spot will converge.