FX MTM Computation

PURPOSE

Marked to market computation for Foreign Exchange and Non-Deliverable Forward Contracts

WHY IS THIS IMPORTANT?

This document shows an example of Foreign Exchange contract’s MTM computation and the reporting currency is HKD.

PROCEDURE

The transaction as at 1-Feb-2009.

The system first computes the MTM to the Against Currency.  The underlying basis for using the Against Currency is that, in most cases, a company would trade a foreign amount against the base currency for hedging.

The system then converts this MTM to the reporting currency of the user’s choice using method 1 or 2 below.

The below explains how the forward rate is computed.

Spot rate at 1-Feb-2009

Spot rates maintained in the system are against the enterprise currency. In this example, the enterprise currency is SGD. Spot rates are maintained under Prices > Exchange Rate.

Forward points at 1-Feb-2009

Forward points maintained in the system are always against USD. Forward points are maintained under Prices > Swap Points.

SGD Swap Points

HKD Swap Points

Computation of Forward Rate

Computation of Forward Points for SGD Ccy

Days Forward                    = 58 (From 1-Feb-2009 to 31-Mar-2009)

Forward Points                 = 58 (Mid-Rate / Tenor * Days Forward)

Computation of Forward Rates for SGD Ccy

Spot rate for USD/SGD                  = 1.4051

Forward Points                                = 58 / 10000

                                                            = 0.0058

Forward Rate                                   = Spot Rate + Forward Points

                                                                    = 1.4051 + 0.0058

      = 1.4109

Computation of Forward Points for HKD Ccy

Days Forward                                  = 58 (From 1-Feb-2009 to 31-Mar-2009)

Forward Points                               = 116 (Mid-Rate / Tenor * Days Forward)

Computation of Forward Rates for HKD Ccy

Spot rate for USD/HKD                  = 7.74533273     

Forward Points                                 = 116 / 10000

                                                                     = 0.0116

Forward Rate                                    = Spot Rate + Forward Points

                                                                     = 7.74533273 + 0.0116

       = 7.75693273

Forward rate for SGD/HKD          = 5.49786145722588   

Currency Rate Curves

The system will present the forward MTM value based on the currency rate curves maintained in the system.

SGD rate curves at 1-Feb-2009

HKD rate curves at 1-Feb-2009

Computation of MTM in HKD

The system allows user to choose either of the following methods when reporting MTM for FX forward and NDF contracts.

Method 1: Tranx Ccy PL

Method 2: Val Ccy PL

If the user does not maintain any currency curves, then the discount rate would be 1.  The result is illustrated here.

Method 1: Tranx Ccy PL

Method 2: Val Ccy PL