Use

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

Forward security transactions are agreements to purchase or sell securities at an agreed upon price at a certain point in the future. This includes all bonds that can be maintained in the SAP System.

Integration / Calculation Basis

In order to value a forward transaction on bonds, you need the transaction data, and alternatively a par coupon or zero coupon yield curve in the transaction currency for the evaluation date. In addition to the yield curve structure necessary for discounting generated cash flows (see initial parameters), it is possible that yield curve structures are also needed to calculate forward rates for variable interest payments.

If the display currency is different from the payment currency of the forward security transaction, the relevant currency rate is needed. If the horizon comes after the evaluation date, and the currency of a payment of the forward security transaction differs from the display currency when calculating a forward transaction on the horizon, a par or zero coupon yield curve structure will have to be entered in the display currency.

Zero bond discounting factors are needed as further input parameters in order to discount the cash flow. The zero and par coupon calculation methods can be used to define the zero bond discounting factors.

The following function modules are used to calculate the input parameters:

Scope of Functions / Valuation

If the horizon comes after the settlement date, the transaction has expired and the NPV is zero.

Otherwise the first step reduces the cash flow to those flows that are due before the settlement date of the transaction. This reduced cash flow is then increased by the cash flows from accrued interest, whose amounts are determined using the accrued interest calculator. Payment of the accrued interest is due on the settlement date of the transaction.

For securities with variable interest rates, the forward reference interest rates are also calculated. For interest rate agreements whose fixed and variable interest rates are tied to formulae, the amount of the resulting interest rates are calculated using the calculated forward rates (possibly taking interest floors and caps into consideration). The calculated interest payments are put into the cash flow, which only contains flows whose size and payment date are certain. According to either the par or zero coupon calculation method, the NPV is calculated to the horizon for both the individual payment flows as well as the cash flow from the purchase/sale or the bond, using the interest yield curves (corresponding to the transaction currency). The purchase or sale cash flow is the price multiplied by the nominal volume on the settlement date. The value of the forward security transaction (in the display currency) is the difference between the NPV of the payment flows converted to the display currency and the NPV of the cash flows from the sale/purchase of the bond, also converted to the display currency.

The following abbreviations/definitions are used:

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