Compounding factor and Forward points: Difference between pages

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(CF).  
Forward points (for example one month forward points of 5-8) are a conventional short-form method of quoting forward foreign exchange (FX) rates, by reference to the related foreign exchange spot quote.


A number greater than one which we multiply a present value by, to work out its [[Future Value]] (FV) as:
The spot foreign exchange quote is adjusted by applying, for example, the one-month forward points to it, to calculate the full one month forward foreign exchange quote.


FV = CF x present value.


<span style="color:#4B0082">'''Example: Full forward quote calculation'''</span>


The periodic Compounding Factor is calculated from the periodic yield as:
If the spot foreign exchange quote is:  


CF = ( 1 + periodic yield ).
GBP 1 = 1.6000 - 1.6010 USD




'''Example'''
And if one-month forward points are 5-8 (rising):


Annual effective yield (r) = 6%.


Number of years in the total period (n) = 2.
Then the one-month forward exchange quote is calculated by adding the forward points as follows:


Then:
1.6000 + 0.0005


Compounding Factor = ( 1 + r )<sup>n</sup>
= 1.6005 USD


= 1.06<sup>2</sup>
1.6010 + 0.0008


= 1.1236.
= 1.6018 USD
 
 
The full forward quote (bid-offer) is:
 
GBP 1 = 1.6005 - 1.6018 USD.
 
 
''It is also often possible for a customer to construct a forward FX contract, by dealing separately in the spot FX contract and the swap points.''




== See also ==
== See also ==
* [[Compounding effect]]
* [[Forward contract]]
* [[Discount factor]]
* [[Foreign exchange]]
* [[Future value]]
* [[Forward foreign exchange rate]]
* [[Present value]]
* [[Spot rate]]
* [[Swap points]]
 
[[Category:Manage_risks]]

Latest revision as of 16:52, 30 May 2016

Forward points (for example one month forward points of 5-8) are a conventional short-form method of quoting forward foreign exchange (FX) rates, by reference to the related foreign exchange spot quote.

The spot foreign exchange quote is adjusted by applying, for example, the one-month forward points to it, to calculate the full one month forward foreign exchange quote.


Example: Full forward quote calculation

If the spot foreign exchange quote is:

GBP 1 = 1.6000 - 1.6010 USD


And if one-month forward points are 5-8 (rising):


Then the one-month forward exchange quote is calculated by adding the forward points as follows:

1.6000 + 0.0005

= 1.6005 USD

1.6010 + 0.0008

= 1.6018 USD


The full forward quote (bid-offer) is:

GBP 1 = 1.6005 - 1.6018 USD.


It is also often possible for a customer to construct a forward FX contract, by dealing separately in the spot FX contract and the swap points.


See also