FX Forward Valuation from Spot Rates and Discount Curves

Summary

The document raises a practical valuation question: how to estimate an FX forward for an exotic currency pair when a pricing system supplies spot rates but no forward quotes. It asks whether spot can be adjusted by the ratio of the two currencies’ discount factors, and whether government zero curves can provide the required rates through interpolation around the forward’s maturity.

It also asks where to obtain these curves, whether they can be refreshed daily, and what alternatives exist when market forward rates are unavailable. The document contains no answer, worked calculation, data source, or evidence confirming a particular procedure. Its main value is identifying relevant inputs and questions; the proposed approach needs validation against market conventions, curve construction, and the currencies’ actual funding rates before it can support reliable pricing. It does not establish that sovereign yields are suitable proxies for FX discounting.

Key ideas

• FX forward valuation can be approached using spot rates and discount factors for both currencies.
• The discount-factor ratio depends on the base and counter currency quotation convention.
• Government zero curves are raised as a possible source for rates, with interpolation to the forward maturity.
• The document leaves the method, data sources, and alternatives unresolved.

Tags

# Calculating FX Forwards Using Spot Prices and Discount Factors for Exotic Currency Pairs


# Calculating FX Forwards Using Spot Prices and Discount Factors for Exotic Currency Pairs












We need to value FX forwards for some exotic currency pairs using a third-party system that does not provide the forward rates. The system can provide spot prices. Is it correct (real) to calculate the theoretical forward price by multiplying the spot price by the ratio of discount factors of the counter currency over the base currency?

Additionally, where can I source the risk-free interest rates? Can I infer the risk-free interest rates from the zero curve by examining the yields from two notable maturities around the value date of the forward and interpolate to get the rate? This process would be repeated once daily for valuation purposes.

Do you know any free services that provide yields for zero-coupon rates of various nations, including more exotic ones? Is this procedure correct? What alternatives are there to address the lack of forward rates for certain currencies? Can the same zero curve also be used to estimate the discount factor for an FX forward?

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