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Using PV01 to Measure Interest-Rate Risk in FX Forwards

Article Quant Q&A · Author: anil knight
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Summary

The question asks whether PV01, often associated with bonds, can measure sensitivity for FX forwards and non-deliverable forwards. The answer frames an FX forward’s value as depending on spot, the two interest-rate curves, and cross-currency basis. Since these inputs affect fair value, risk managers can bump relevant market inputs and measure the resulting change in value.

The central lesson is that interest-rate sensitivities are useful for products beyond bonds, including FX forwards and NDFs. The response does not define a specific PV01 convention, give a bump size, or calculate an example. In practice, the measure depends on which curve or rate is shifted and how the sensitivity is reported, so the brief answer establishes the general applicability of rate-risk analysis without prescribing a complete risk methodology.

Key ideas

  • FX forward and NDF values depend on spot, interest rates, and cross-currency basis.
  • Market inputs can be bumped to estimate their sensitivities in fair value.
  • Interest-rate sensitivities such as PV01 can be relevant to instruments beyond bonds.
  • A complete PV01 measure needs a clear definition of the curve and bump convention.

Tags

ForexFixed incomeRisk management
Full text
# PV01 used to measure exposure to fx forward/NDF?


# PV01 used to measure exposure to fx forward/NDF?












I was wondering if it's possible to use PV01 as a sensitivity for fx forwards and NDFs in risk management? I came across this at work and I was pretty confused as I always thought pv01 is only for bonds. If anyone could shed some light it would be great!

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/81579

The fair value of an FX forward (delivery or non-delivery) is calculated by a (pretty simple) model, whose inputs include the spot exchange rate, the 2 interest rates (with term structure), and the cross-currency basis.

Therefore it makes sense to bump some of the inputs and see how the fair value changes, e.g. to calculate sensitivities to a change in spot exchange rates, change in interest rates, etc.

Bonds are not the only products where looking at sensitivities to changes in interest rates is helpful.

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.