Mastering Financial Calculations: A step-by-step guide to the mathematics of financial market instruments, Second edition

Chapter 8. Foreign Exchange

“A forward foreign exchange swap is a temporary purchase or sale of one currency against another. An equivalent effect could be achieved by borrowing one currency, while lending the other.”

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Introduction

Spot exchange rates

Forward exchange rates

Cross-rate forwards

Short dates

Calculation summary

Value dates

Forward-forwards

Time options

Long-dated forwards

Arbitraging and creating FRAs

Discounting future foreign exchange risk

Exercises

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Throughout this book, we have mostly used ISO codes (also used by the SWIFT system) to abbreviate currency names. You can find a list of the codes in Appendix 5 for reference.

Introduction

A convention has been used that, for example, the US dollar/Japanese yen exchange ...