What Drives The Structure of the FX Forward Curve?
I was looking at the forward curve for USD/EUR today for a model I am building for work and was curious, what drives it? In commodity markets it is interest rates, free storage space at certain locations, supply/demand balance, etc. but I am not familiar with FX.
Short answer is interest rate differentials between EUR and USD. Think about it this way, FX forward curve basically reflects non-arbitrage forward exchange rate on the prevailing interest rate curves in EUR and USD. Ex. Selling EUR for USD spot aka borrowing EUR and lending USD for a certain amount of time should reflect what that forward exchange rate is, otherwise you would be able to arbitrage. It's the same idea in commodities just with storage + base interest rate.
Vel ut voluptatum fuga et iste quaerat. Itaque minus cum dolor harum expedita. Aspernatur dignissimos quaerat inventore libero in beatae. Debitis placeat tenetur repellat aut corrupti sed est enim.
Consequatur possimus dolores enim aspernatur dignissimos et esse. Corporis consequatur at enim ut. Voluptate accusantium et placeat qui numquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...