I am trying to understand what the forward rate is in one year on EUR/ USD and do not understand this website:
http://www.fxstreet.com/rates-charts/forward-rates/
It seems like you should add the bid number to the spot rate = forward rate. Can someone confirm this?
Cheers
Yes
The current spot rate for EUR/USD bid is 1.3197
1 month forward rate is 2.4900
But the above forward rate needs to be divided by 10000 (and this depends on currency pair) to get the number you add to the spot rate
The calculation is 1.3197 + .000249 = 1.319949
The 1 year forward rate is 30 You do NOT add that to the current spot of 1.3197 + 30 = 31.3197. It should be 1.3197 + (30/10000) = 1.3227
cheers, yeh that seems correct.
Fwd points are always quoted in pips fyg.
Okay, so I am thinking and a little confused about something.
Which is correct for the forward rate calculation USD/ EUR:
Assume: EUR/USD = 1.3266 USD/ EUR = 1/ 1.3266 = 0.7538
Forward rates: EUR/ USD: 25.411 = 1.3266+ 0.0025411 = 1.3291 USD/ EUR: 1/ 1.3291 = 0.7523
OR
Forward rates: EUR/ USD: 25.411 = 1.3266+ 0.0025411 = 1.3291 USD/ EUR: 1/25.411 = 0.0394 = 0.7542 + 0.000394 = 0.7542
Cheers for the responses.
yeah the first example is correct same goes for calculations of crosses
Ugh, this is just math... think about it and you'll figure it out.
FRA (Forward Rate Agreement) (Originally Posted: 03/07/2011)
If in a given FRA (Forward Rate Agreement) the reference rate choosen to be used is based on SONIA, what's the procedure to be followed to determine the reference rate? Should it be a simple arithmetic average? Or a geometric average with SONIA daily values from the settlement day to one day before maturity?
Thanks!
SONIA is already an average, I am pretty sure. I don't really understand your question, one party agrees to pay XXLibor and other agrees to pay floating. You net the difference and liability holder pays the other.
Yes, I know SONIA is already an average. Suppose I'm the one who's going to pay a fix interest rate on the notional value at the agreed future date. My counterpart will pay a not fixed interst rate, in this case, SONIA. But SONIA changes daily. One day before the maturity date, the interest rate my counterpart is going to pay me will be based on SONIA, but it's not going to be its value at the end of that day (that I know for sure). What I want to know is how they are going to determine the interest rate based on SONIA values ranging from the contract's settlement day to the fixing day (one day before the maturity day).
Your post does not make it very clear what you're asking... but the rate used is the rate on the fixing day (ie if FRA fixes on 3/8/11 its SONIA/LIBOR/EURIBOR/whatever on this date).
Like the name implies, you're pricing the reference rate forward. So it's not an average or anything like that, it's what the market thinks SONIA will be on the fixing date.
Forward Rate Discounting (Originally Posted: 07/08/2013)
I'm trying to build a swap curve, and I have a few clarifying questions. Everything will be based on LIBOR discounting, not OIS.
For finding a discounting forward rate, say Eurodollar Futures, the correct formula is DF2/DF1= DF? (with DF2 being the future with the later expiration date) I've read in some places that you can also multiply the two discount factors to find the respective discount factor? But, I know they can't both be right...
And then the formula to find the LIBOR rate from the DF is (1-DF)/(DF*T) (with T being time, ex. 90/360). Correct?
After finding the rate, and multiplying by the notional value to find the cash flow for that period, do you discount that with the DF that you found before?
Thanks.
Yeah you add the points to the spot.
EUR/USD 1m = 2.5 If spot is 1.30, then fwd is 1.30+2.5/10000
Be mindful that for inverted currencies the direction is different. If you want to buy and sell a non-inverted currency (like EUR), then you hit the left-hand side. If you want to buy and sell an inverted currency (e.g. HKD) then you lift the right-hand side.
The reason that stuff is quoted as points and not outright levels is because that's what matters in the market. If you trade EUR/USD at 1.30/1.30+2.5/10000 or 1.31/1.31+2.5/10000 it's the same thing, what matters is the % difference between the two so given the spot rate doesn't move much (very little convexity) all that matters is the difference between the two. FX fwds are rates instruments, not for "delta one" exposure to a currency
I think you are looking at it wrong. EDs are not spot runs, they are forward rates at maturity. Ie U3 gives you the 3mL rate for 18 Sep, Z3 gives you the 3mL rate for 18 Dec and you can interp all the 3mL sets inbetween. When you're discounting 5x8 18th (i.e. the 18th Dec 3m LIBOR FRA, which you would expect to be 100-price of Z3 ED) you discount it back at the prior libor rate (being 100-price of U3 ED) to get to the PV as at 18th Sep.
Pricing and hedging swaps is a book that will walk you step by step through this process.
There's also a paper by Uri Ron on how to build a swap curve. It's sort of the most common starting point for these things, if you're somewhat mathematically inclined (which you should be, given what you're trying to do).
See it here: http://www.bankofcanada.ca/wp-content/uploads/2010/01/wp00-17.pdf
I just eyed it, but it looks very good! Like said in the other thread about money markets, bear in mind not all the assumptions still stand, but it's a great starting point, much better than the book I recommended.
Thanks everyone, I appreciate it. I will take a look at the paper, and try to get my hands on the book as well.
Difference between Short Rate and Forward Rate? (Originally Posted: 01/27/2014)
I can't grasp the difference between short and forward rate. Could someone elaborate to me in plain words what the difference between the two (under uncertainty) is?
Textbook excerpt from bodie kane marcus - Investments:
'' ... Finally, the forward rate for period n is the short rate that would satisfy a “break-even condition” equating the total returns on two n-period investment strategies. The first strategy is an investment in an n-period zero-coupon bond; the second is an investment in an n - 1 period zero-coupon bond “rolled over” into an investment in a one-period zero. Spot rates and forward rates are observable today, but because interest rates evolve with uncertainty, future short rates are not. In the special case in which there is no uncertainty in future interest rates, the forward rate calculated from the yield curve would equal the short rate that will prevail in that period. ''
See these all the time in swaps. So, short 5y5y = 5yr real rate starting in 5 years, i.e. in time 5-10.
These rates are both a prediction and are locked in, so you are taking some risk.
You can also pay the 5y5y and have it be = pay spot 10y and receive spot 5yr - i hope you can see first 5 years CFs are nil.
In general, sorta like what zeropower said...
"Short rate" is used to denote the prevailing funding interest rate (e.g. LIBOR, GC or OIS) at any given point in time, including the future. Obviously, nobody knows the path of future short rates.
"Forward rate" is a mkt rate that can be calculated from spot rates for which direct quotes are available. One interpretation of the fwd rate is that it's the mkt's "risk-neutral" expectation of the evolution of the appropriate short rate over the relevant future period. A simplest example of this is something like the Eurodollar contract, which is a fwd rate.
All of the above is sorta the point of your textbook excerpt...
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