FX Forward Valuation

  

M 917 536 3378 maksim_kozyarchuk@yahoo.com

Introduction I am delighted to announce that the Kupala-Nich platform now supports FX Forward valuation. OTC valuation within the Kupala-Nich platform is primarily built on top of QuantLib. However, while integrating FX Forward support, I was surprised to discover that QuantLib does not natively support FX Forward products. Consequently, introducing FX Forward valuation into Kupala-Nich required additional considerations, particularly around designing modeling APIs for accurately defining FX Forward positions. If anyone has insights into why QuantLib lacks direct support for FX Forwards, I would greatly appreciate being pointed toward any relevant discussions or documentation.

Defining FX Forward Products in Kupala-Nich Clear and precise definitions of FX Forward terms are fundamental to accurate valuation. Kupala Nich uses the following six fields to define FX Forward: currency_pair: Identifies the currencies traded and establishes the quoting convention for the forward rate. traded_currency: Specifies the currency used for expressing the trade's notional and direction. For example, stating "buying 100K EUR at 1.1" differs from "buying 100K USD at 1.1," as each scenario represents unique trading exposures. direction: Denotes the trade direction as either Buy or Sell relative to the traded currency. notional: Represents the notional amount traded in traded currency. forward_rate: Defines the agreed FX rate at the maturity date according to the currency pair convention. maturity_date: Specifies when the FX Forward contract reaches maturity. Implementation of FX Forward Valuation FX Forward valuation involves decomposing the forward contract into two separate cashflows based on the forward exchange rate. Each cashflow is then discounted to the spot date using appropriate discount curves for each currency. Subsequently, these discounted cashflows are converted into the traded currency using the spot rate and discounted again to the valuation date. Kupala-Nich calculates additional analytical measures alongside the NPV, including: FX Spot rate used in valuation. NPV provided in both traded and base currencies. FX Delta for each currency, reflecting the discounted value. Detailed Cashflows breakdown including discount factors and present values. Bucketed DV01 analysis, highlighting sensitivity to shifts in benchmark curves. Below code snippet demonstrates FX Forward valuation using QuantLib. joint_calendar = ql.JointCalendar(curve1.calendar, curve2.calendar, ql.JoinHolidays) spot_date = joint_calendar.advance(valuation_date, ql.Period(spot_days, ql.Days)) df1 = curve1.discount_factor( matrity_date, spot_date) df2 = curve2.discount_factor( matrity_date, spot_date) df1_spot = curve2.discount_factor( spot_date) fx_delta1 = df1 * notional1 fx_delta2 = df2 * notional2 fx_delta2_in_curr1 = convert_to_ccy(fx_delta2, curr2, curr1) npv_local = df1_spot * ( fx_delta1 + fx_delta2_in_curr1 ) Handling Joint Calendars Proper date management, considering the calendar differences and holidays of both currencies involved, is important. Kupala-Nich employs QuantLib's ql.JointCalendar(curve1.calendar, curve2.calendar, ql.JoinHolidays) method, creating a combined calendar to accurately determine spot or maturity dates, critical for precise FX valuation. Curves: OIS vs FX Curves Currently, Kupala-Nich employs Overnight Indexed Swap (OIS) curves for FX Forward valuation. However, a significant basis exists within FX markets due to short-term dynamics, underscoring the limitations of using OIS curves exclusively. Recognizing this, future enhancements will introduce FX-specific curves, providing more accurate valuations, particularly beneficial for short-dated FX Forward contracts. For further insights, reference CME Group’s detailed analysis on FX year-end dynamics here.