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Collateralized and Uncollateralized Discounting for FX Forwards

Article Quant Q&A · Author: Student
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Summary

This brief exchange asks which discount curves market participants use to value FX forwards under collateralized and uncollateralized arrangements. The response points readers to research on collateral currency choice, multiple swap curves, and collateralized versus unsecured derivative pricing. These references indicate that the relevant framework distinguishes the collateral agreement and its currency when selecting discounting assumptions.

The document does not explain a specific curve construction, provide a worked valuation, or compare market conventions. A second response recommends a general derivatives textbook for background on FX cash flows and discounting, but adds no concrete technical detail. As a result, this is best treated as a pointer to further reading rather than a complete answer. It leaves the original practical question unresolved, including which curves to apply in particular market setups.

Key ideas

  • FX forward discounting depends on whether the trade is collateralized and on the collateral arrangement.
  • The cited literature addresses collateral currency choice and the construction of multiple swap curves.
  • The exchange gives references rather than a step-by-step valuation method or definitive market convention.
  • A general derivatives textbook is suggested for foundational background on FX cash flows.

Tags

ForexDerivatives pricingFixed income
Full text
# FX Forwards collateral and discounting


# FX Forwards collateral and discounting












What is the market convention for discounting the future cash flows of FX forwards? In particular, I would be interested to know what discounting curves are used for both collateralised and not collateralised FX forwards.

## Answer by ir7 (score 3)

https://quant.stackexchange.com/a/61646

See 'Collateral Posting and Choice of Collateral Currency' (Theorem 1, in particular) and 'A Note on Construction of Multiple Swap Curves with and without collateral' by Fujii et. al., and also 'Cooking with Collateral' by Piterbarg (the basics of unsecured and collateralized cases for forward contracts in general are covered in Piterbarg's paper 'Funding beyond discounting: collateral agreements and derivative pricing').

## Answer by eruiz (score -2)

https://quant.stackexchange.com/a/61639

I would suggest picking up the book "Options, Futures, and Other Derivatives" by Hull. Lots of good knowledge on cash flows pertaining to FX, etc. A bit more quantitative but the discounting aspect is emphasized and I think it will make better sense. If you can't find a download link, lmk :)

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.