FX Forward and Swap Pricing with Rate Differentials and Market Quotes
Summary
The document explains ways to obtain FX forward prices and points through Bloomberg and Excel, and gives theoretical pricing relationships based on spot rates and the interest-rate differential between two currencies. It describes a swap as combining spot and forward exchanges, or as two offsetting forward legs when it starts in the future.
It cautions that simple deposit rates may not reproduce observed market forwards, using six-month EURUSD and Libor/Euribor as an example. Market prices can reflect financing constraints and rates that are not available for unlimited borrowing or investment, so the mismatch does not by itself establish arbitrage. The text also points to implied-rate calculation from a forward price and one currency’s rate. It offers no worked numerical calibration or discussion of conventions such as day counts, collateral, or settlement details.
Key ideas
- FX forward values are theoretically linked to spot and the relative funding rates of the two currencies.
- Continuous and simple compounding lead to different expressions for the theoretical forward rate.
- An FX swap can be represented with offsetting spot and forward or forward-forward legs.
- Simple deposit rates may not match market forward quotes because actual financing terms differ.
- A forward quote and one currency’s rate can be used to infer an implied rate for the other currency.
Tags
Full text
# Pricing of Fx Swap and Fx Forward in excel
# Pricing of Fx Swap and Fx Forward in excel
How to do pricing of FX Swaps and Fx Forward in excel can anyone show the same which will match the bloomberg.I am calculating by adding or subtracting the fx fwd points in fx spot rate to arrive at forward if anyone have abything else please share the same . I am also looking at bloomberg syntax for fx fwd and fx swaps . I am doing it by putting QRM and after that the foreign exchange .
## Answer by David Duarte (score 2)
https://quant.stackexchange.com/a/51096
You can check the prices of FX forwards on Bloomberg by typing `EURUSD Curncy FRD<GO>`
In Excel, you can use Bloomberg functions to get the prices (forward points or outright prices). For Example, to get the 6M FX Forward for the EURUSD, you can enter the formula:
`=BFxForward("EUR";"6M";"midoutright")`
Theoretically, an FX Forward can be calculated with the rate differential like so:
$$FX_{Forward} = FX_{Spot} \times \frac{(1+ r_{domestic} \times n)}{(1+ r_{foreign} \times n)}$$
or, if you have rates with continuous compounding:
$$FX_{Forward} = FX_{Spot} e^{[(r_{domestic} - r_{foreign}) \times n]}$$
The FX Swap will just be an FX Spot + an FX Forward of symmetric signs or two FX Forwards of symmetric signs if it's forward starting.
However, you should be aware that this is a theoretical formulation and if you try to replicate the market prices of FX Forwards with simple deposit rates, you will not arrive at the same result. And this does not represent an arbitrage because you can't really get financing and/or invest unlimited amounts at these rates if at all.
For example, consider you have a 6 month FX Forward on the EURUSD. If you try to replicate this forward using the USD Libor 6M and the Euribor 6M, you will NOT get the market price.
What you can do is given a price of an FX Forward and a rate on one of the currencies, get the market implied rate of the other one.
There is a Bloomberg function to get the implied rates: `FXFA <GO>`.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.