Forward Exchange Rate Valuation

S

Sanjay Sachdev

New member
Joined
Nov 27, 2014
Messages
0
Reaction score
0
Hi Everyone,
I want to value INR-JPY FX Forward rate and I’m using below formula, is that the correct one to apply practically? If yes, then wch int rate should i use to value the same..will 3 mnth libor rate work for JPY ?
F = S(1+Rfdc)^t/(1+Rffc)^t
TIA…
 
Dont quote me on this as I am just going through Econ. You should be using the JPY rate on the top, as it is your base currency. INR rate would be on the bottom as that is your foreign currency.
 
Yayyywork wrote:
Dont quote me on this as I am just going through Econ. You should be using the JPY rate on the top, as it is your base currency. INR rate would be on the bottom as that is your foreign currency.
Click to expand...
Base currency is in the denominator, price currency goes in the numerator. If JPY is base, it’s in the denominator.
 
Agreed, can you please help me wid specific int rates? So as to wch int rates should be used…
 
Good call, kept getting that shit mixed up going through last night. I assumed his formula was right as I couldnt remember mine and didn’t have my books. Time to run through my notecards some more
 
I saw in the book the Forward rate is calculated as:
F(P/B) = S(P/B) * [ 1 + Rate(P) / 360 ] / [ 1 + rate(B) / 360 ]
If you want the 3-month forward rate, then use the 3-month risk-free rate of each currency. Using Libor is ok.
Note that P/B is (price / base) currencies, and also note they are always in that order (P over B).
 
Harrogath wrote:
I saw in the book the Forward rate is calculated as:
F(P/B) = S(P/B) * [ 1 + Rate(P) / 360 ] / [ 1 + rate(B) / 360 ]
If you want the 3-month forward rate, then use the 3-month risk-free rate of each currency. Using Libor is ok.
Note that P/B is (price / base) currencies, and also note they are always in that order (P over B).
Click to expand...
To add to this– remember that foreign and domestic are relative terms. The price and base convention is an absolute notation. That formula (in harrogath’s post) should make sense to you. To find the forward value of the numerator, multiply the units of PC (price currency) by a time-appropriate interest rate factor for the PC. To find the forward value of the denominator, multiply the units of BC (1, usually) by time-appropriate interest rate factor for the BC.
Hope this helps!
 
Alright, what do you think how Bloomberg is pricing forward rates? Does anyone have insights on this?
 
You must log in or register to reply here.
Back
Top