Fair Value

[leu04jam]

Hi, I am reasonably new to trading and would like it if someone could pls explain how the fair value for currency futures are calculated? For example when a new futures contract month comes into play how do they price it (i recognise that it has something to do with the interest rate diffs etc but just cant find anywhere to put fair val on currencies). A formula would be great as i would like to get it into a spreadsheet. Sorry for such a basic question, was the only place I could of think where I might be able to get an answer.

 

[grantx]

Leu,

I’m assuming the valuation of a forward rate is the same as a future rate. I think this is right.

Eg EUR/USD spot rate = 1.4700

90-day future:

Spot rate x (1 + US interest rate x 90/360) / (1 + Euro interest rate x 90/360) =

1.47 x (1 + 0.045 x 90/360) / (1 + 0.04 x 90/360) = 1.4718.

See Mastering Financial Calculations, Robert Steiner.

Grant.

 

[leu04jam]

Thats perfect, that was the one I was looking for. Thanks for taking the time to do that.