How Delayed Settlement Changes an FX Forward’s Valuation

Summary

The document asks how to classify an FX forward whose currency exchange occurs after its stated maturity date. In the example, the forward rate is set for an earlier expiry, while settlement is delayed by a month. It also asks whether gross settlement, with both currencies exchanged, differs from net settlement, where a single US dollar payment reflects the gain or loss at maturity.

The answer describes this as a nonstandard instrument. It explains that the interval between the forward’s pricing maturity and the later cash exchange creates an additional period in which the cash amounts have time value. Valuing those amounts therefore involves the relevant interest rates through the settlement date, which can be viewed as an implied forward exposure. The response is brief and does not fully resolve the distinction between gross and net settlement or specify a formal valuation framework.

Key ideas

• A forward’s pricing maturity and currency settlement date can differ.
• The delay leaves a period during which the settlement cash flows have time value.
• Interest rates over that period affect the value of the delayed cash amounts.
• The answer characterizes the arrangement as nonstandard and does not fully compare net and gross settlement.

Tags

# Is an FX forward with delayed settlement still a derivative?


# Is an FX forward with delayed settlement still a derivative?












As an example: Trade date: 1/1/16 Maturity date: 2/29/16 Settlement (exchange of currencies) 3/31/16

Is the instrument between 2/29 and 3/31 still deemed a forward? The forward rate is determined so that the fair value is zero at 1/1/16 with expiry date 2/29/16.

Edit (2/7/16): Would the answer be different for the following cases:

- Forward is gross settled - i.e. two cash flows occur, each in their respective currencies

- Forward is net settled - only one cash flow occurs in USD determined as gain or loss on maturity using 2/19 fx rates. The cash flow itself occurs on 3/31.

## Answer by rupweb (score 1)

https://quant.stackexchange.com/a/23134

This is a non standard instrument. In most cases maturity date = settlement date otherwise, yes, you get this 1 month of interest between the forward maturity date used for the interest rate calculations to get the price of the forward, and thus the cash amounts required for settlement. Then you get 1 month waiting to settle those cash amounts. So there's another implied forward due to NPV of the cash amounts during that month according to the 1 month interest rates until the maturity date cash amounts become due on the settlement date...

I don't really understand why such an instrument would exist, but it is a kind of implied 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.