Valuing the Forward Legs of an FX Swap
Summary
The answer explains the basic structure of an FX swap as two opposite currency transactions on different dates. Depending on the dates, the pair may consist of a spot transaction and a forward transaction, or two forward transactions. It also notes that the notionals can be equal or unequal and that the swap is valued at zero when initiated.
For valuation after inception, the answer focuses on the outstanding forward exposure. In a spot-plus-forward structure, it says to value the forward leg because the spot exchange has already taken place. In a forward-plus-forward structure, value each forward leg and combine their values. The document links the forward value to the currencies’ interest-rate differential and forward points, but the promised valuation formula is absent from the supplied text. It consequently gives a useful decomposition, while leaving the calculation details—such as discounting, market inputs, and treatment of short-dated settlement conventions—unexplained.
Key ideas
- An FX swap pairs opposite currency transactions on two dates.
- A swap can combine a spot leg with a forward leg or contain two forward legs.
- After a spot exchange has settled, the remaining forward exposure drives the valuation.
- For two-forward structures, value both legs and combine their values.
- The document refers to interest-rate differentials and forward points but omits the actual formula.
Tags
Full text
# How can we value NPV for a standard FX Swap? # How can we value NPV for a standard FX Swap? hope you are all well! Was just wondering how we can value the NPV on the value date for a FX swap - i'm sure it's by evaluating the interest rate payable/receivable from the trade date until the value date? for the short term swaps i.e - SN, TN, ON - how can we calculate what the end NPV is from trade date > value date? Thanks! ## Answer by Xomuama (score 1) https://quant.stackexchange.com/a/70689 (I will use the quotation FOR/DOM for any currency pair) As you know, an FX swap consists in two transactions : - A purchase (or sale) of a currency FOR at a specific date (often, but not always, the spot date of the currency pair. If spot : fx swap = spot + forward // If not spot : fx swap = forward + forward). - An opposite transaction : a sale (or purchase) of the currency FOR at a later date. The amount can be the same (Even swap) or different (uneven swap). The dates can match the classic tenors (ON, TN, SN, SW (=1W), 2W, 1M, etc...). You also know that the value of an FX swap is zero at inception. Globally, what you should remember is that only the forward leg(s) matter for the evaluation of the fx swap. If it's a spot + forward, you can value the NPV only by considering the forward leg. If it is a forward + forward, can can compute both NPV and add up together to get your swap NPV. Indeed, once the spot transaction is done, what matters is only the forward leg (implicitly your interest rate differential, your points). Value of a forward in a FOR notional : Compute this formula for any forward legs and you're good to go :)
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