Forward Exchange Transaction 
The price calculator for forward exchange transactions calculates current market values as well as market/time values for a future date (horizon).
With forward exchange transactions, a specified amount of a currency is exchanged against another currency at a future key date using a specified exchange rate.
You use the Transaction Manager to generate a cash flow when creating a forward exchange transaction. The cash flow consists of both exchange payments (agreed upon in the transaction) in both transaction currencies that are made upon maturity of the forward exchange transaction.
To discount the cash flow, zero bond discounting factors are required as additional input parameters. To determine the zero bond discounting factors, you can use the zero coupon calculation method and the par coupon calculation method. If the horizon falls after the evaluation date, the corresponding forward exchange rates of the transaction currencies are calculated for the horizon in the display currency using the yield curves of the transaction currencies and the yield curve of the display currency from the currency exchange rates valid on the evaluation date.
The following function modules are applied in the calculation of the input parameters:
Features
Valuation
If the due date of the transaction falls before the horizon, the forward exchange transaction has a value of zero at the horizon. The foreign exchange payments do not flow into any foreign currency balance in the component Risk Management.
If the due date of the transaction falls after the horizon, a value can be calculated. During the valuation, both cash flows that occur on the due date are discounted to the horizon using using the relevant yield curves (of both transaction currencies). The net present value of the forward exchange transaction is the difference between both cash flows discounted using the currency exchange rates (bid and ask rates) and converted into the display currency.
The following definitions apply:
C |
Cash flow of the purchase side of the forward exchange transaction |
D |
Cash flow of the sales side of the forward exchange transaction |
DV(C/D) |
Value of cash flow C/D discounted to the horizon |
C(C/D) |
Currency of cash flow C/D |
DC |
Display Currency |
ER(C(C); DC) |
(Forward) exchange rate C(C)/DC |
NPV |
Net present value |
NPV = DV(C) * ER(C(C); DC) — DV(D) * ER(C(D);DC)
Note
The net present value of a non-deliverable forward (NDF) is also calculated using this formula. After an NDF has been fixed, the net present value of an NDF is only the clearing amount discounted to the horizon and converted into the display currency.
NPV = DV(A) * ER(C(CA);DC)
whereby CA = clearing amount