Pro-rata Forward and Time-option Forward
Settlement rate calculation Settlement rate = Base rate + (Swap Point per day x n) n = Number of days, from the first day of the (specified) period until the settlement date
Gain & Loss
Similar to the conventional FX Forward, gain and loss of the Pro-rata and Time-option Forward are calculated from;
- the difference between the forward rate (contracted rate) and the market (spot) rate on the settlement date, multiplied by the notional amount.
If the forward rate is higher than the market rate on the settlement date, exporters will gain from their transactions (but the importers will loss). However, if the forward rate is lower than the market rate on the settlement date, importers will gain from their transaction (and the exporter will loss).
Example
USD/THB forward rate = 35.00, market rate on settlement date is 36.00, Notional amount = US$1,000,000
Exporter : (forward rate – spot rate) x notional amount
: (35.00 – 36.00) x $1,000,000 = -1,000,000 Baht >>The exporter has opportunity loss = 1,000,000 Baht in this transaction
Importer : (spot rate – forward rate) x notional amount
: (36.00 – 35.00) x $1,000,000 = 1,000,000 Baht >> The importer has opportunity gain = 1,000,000 Baht from this transaction
Scenario Analysis
|
USD/THB Forward Rate |
USD/THB Market Rate |
Notional Amount (USD) |
Gain/ loss on forward (THB) | 35.00
| 40.00
| 1,000,000 | -5,000,000 | | 35.00 | 39.00 | 1,000,000 | -4,000,000 | | 35.00 | 38.00
| 1,000,000 | -3,000,000 | | 35.00 | 37.00 | 1,000,000 | -2,000,000 | | 35.00 | 36.00 | 1,000,000 | -1,000,000 | | 35.00 | 35.00 | 1,000,000 | 0 | | 35.00 | 34.00 | 1,000,000 | 1,000,000 | | 35.00 | 33.00 | 1,000,000 | 2,000,000 | | 35.00 | 32.00 | 1,000,000 | 3,000,000 | | 35.00 | 31.00 | 1,000,000 | 4,000,000 | | 35.00 | 30.00 | 1,000,000 | 5,000,000
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- Assume client enter into a forward selling of USD against THB and time value of money is not consider
- Gain and loss from the forward will continue to increase as market rate differ from forward rate (contracted rate)
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