The market price calculator for forward exchange transactions calculates current market values, time values, and future market values (the future point in time is the horizon).

With a forward exchange transaction one currency is exchanged against another on a key date in the future at an agreed upon rate.

If the settlement date of the transaction comes before the horizon, the forward exchange transaction has a value of zero on the horizon. The currency payments don’t flow into a currency position in the Risk Management component.

If the settlement date of the transaction comes after the horizon, a value can be calculated. In valuing the transaction, the NPV on the horizon is calculated for both cash flows which flow on the settlement date. The calculation uses the appropriate yield curves from the transaction currencies. The NPV is the difference between the NPVs of the two cash flows, which have been converted to the display currency using the appropriate exchange rate (ask or bid price).

In order to value a forward exchange, you need the transaction data, and alternatively a par coupon or zero coupon yield curve in the transaction currency (ask or bid rate) for the evaluation date.

The currency rates (bid and ask rates) of both transaction currencies in relation to the display currency are needed. If the horizon comes after the evaluation date when calculating a forward exchange rate (bid or ask rate) on the horizon, a yield curve will have to be entered in the display currency.

With the help of the Treasury Management component, a cash flow is generated when a forward exchange transaction is created. The payment flow consists of both exchange payments in both transaction currencies, which flow on the settlement date of the transaction.

Zero bond discounting factors are needed as further input parameters in order to discount the cash flow. The zero and par coupon calculation methods are available for defining zero bond discounting factors.

If the horizon is later than the evaluation date, the corresponding forward currency rates (bid or ask price) of the transaction currencies are calculated for the evaluation date using the yield curves from the transaction and display currencies.

The modeled cash flow only contains payments, whose amount and payment date are known. Depending on the method of calculation (par or zero coupon method), the NPV of the individual cash flows is calculated for the horizon, using the yield curve of the transaction currency. The value of the forward exchange (in the display currency) is the difference between the NPVs of the two cash flows. The value is converted to the display currency using the (forward) currency rates (bid or ask).

The following abbreviations/definitions are used:

• C: Cash flow of the call side of the forward exchange.
• D: Cash flow of the put side of the forward exchange.
• BW(C/D): NPV of the cash flow C/D on the horizon
• W(C/D): currency of cash flow C/D
• DC: display currency
• WK (W(C);AZ): (forward) exchange rate W(C)/AZ (bid or ask rate)
• NPV: net present value