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How to purchase currency at the price "from the future": Futures and forwards

In our blog on Habré we already told about derivative financial instruments and, in particular, futures. Today we will talk about how these tools in application to currencies work.

Back in the future: forward contract


Not the most obvious thought, but currency rate for date in the future is not unknown value — it is known right now. Of course, this is not about a prediction of what the course of a certain currency will be in reality — only psychics or analysts (can do such predictions and, when forecasting a course for specific date between them not such big difference).

The price at which it is possible to make the transaction with currency with calculations in specific date in the future is known. And such opportunity is given by both banks, and the Moscow exchange is the future/forward contract fixing the price (currency rate) of date in the future.

Such contracts on purchase and sale of currency for any dates consist many years banks and their clients. It is convenient for business — signed the contract for delivery of the equipment, the forward purchased, and it is not necessary to worry about possible rate movements "not in that party".

All this occurred within limits of credit risk, however then the situation changed. The problems in national economy caused by sanctions and reduction of prices of oil resulted in difficulties both in real sector, and in bank. Reliable large banks completely closed or significantly reduced the limits by clients, and banks of the third echelon became for clients a risk subject. All this resulted in the actual lack of an opportunity to conclude bargains or strongly raised the prices of derivative tools.

How many the forward has to cost


It is important to understand that currency value calculations for a certain date in the future has no relation to forecasting of currency rate, and is mathematical value and is calculated through the cost of money in time, that is a difference in rates between two currencies.

In other words, to purchase dollars for rubles which are absent yet, they need to be borrowed. And a loan difference in bank from a loan in the financial market only in rates. The calculation formula of cost of the forward on purchase of dollars looks so:

Стоимость форварда USDRUB = (% ставка*) х (валютный курс) х (дней до исполнения форварда)/365

* — the interest rate is an interbank rate of a swap here (values of bank fixings are available according to the link)

The theoretical price of the forward at the same time consists of currency rate and cost of the forward (time).

Let's review an example of calculation of cost of the forward:

Let's say that currency rate equals 60 rubles for one dollar. The forward's term = 45 days, a rate for 45 days = 11,5%.

In that case the cost of the forward will make:

Стоимость форварда = (11,5%)х60х 45/365= 0,85

Теоретическая цена форварда=60+0,85=60,85

The trick is that use of the central partner removes risks from both parties of the transaction. A partner for the parties is NKTs Bank, so conditions parity, without allowance for credit risk. Thus, buying currency by calculations in the future, the company really buys it now, borrowing rubles under final settlement on an interbank rate.

Percentage risk vs cost


Futures at the exchange ekspirirutsya quarterly. It means that when hedging any business contract need of its sale before date of expiration — for example arises the future, a day before payment under the contract.

In that case the selling price will consist of a current rate and temporary cost before expiration on the current interest rate. As the interest rate on the date of purchase of the future and its sale can not match, the percentage risk appears.

Percentage risk = (change of % of a rate) x (currency rate) x (days before execution of the future)/365

Example of calculation of percentage risk:

  • Let's assume that it is necessary to sell the future in 45 days prior to its expiration;
  • The current interest rate is equal to 11,5%;
  • The course makes 60 rubles for US dollar;
  • Alleged interest rate reduction of 1%.

In that case the percentage risk will be calculated on a formula:

Процентный риск = 1%х(60) х 45/365 = 0,0739

That is change of interest rates for one percent, at sale of the future in 45 days prior to expiration, makes 7,3 kopeks from one US dollar.

Forwards and futures


Forward contracts can be signed for any date, for example, precisely under the contract for delivery of the equipment signed by the company. In them there is no percentage risk (there is no need of early sale), they are, as a rule, more expensive, than futures.

In this case the solution on whether it is worth undertaking percentage risk (that is the choice between use of the future and the forward) will depend on expectations of the finance director of the company on change of interest rates, and also on rationality of an award on the forward in comparison with the future. To calculate an award it is necessary, to count a rate proceeding from quotations of the future and currency rate at the exchange, and then based on this rate to determine the fair price of the forward for necessary date.

Small layfkhak:

At the Exchange it is possible to conclude the deliverable bargains with currency for up to 365 days which are actually complete analogs of forwards from the point of view of percentage risk and futures from the point of view of providing transactions.

Conclusion


The main complexity during the work through the Exchange is need of introduction of warranty providing for transactions. The limit from reliable bank removes this need for providing - it is the most obvious and significant plus for benefit of use of the off-exchange market.

In case of lack of a limit from bank from the top ten you should not push luck. The Moscow Exchange gives much more transparent mechanism of work on the basis of providing. Pricing is clear, there is a possibility of address transactions with the same banks, and risks connected with execution of transactions aim at zero.

On the website ITinvest detailed information on purchase of currency by calculations is provided in the present and the future at the Moscow exchange for the companies and private investors. Besides, we implemented the special calculator by means of which it is possible to count benefit at acquisition of currency in the financial market, but not in bank.

For today everything, thanks for attention! Do not forget to subscribe for our blogs on Habré and Geektimes.

Author: Philip Agrachev, Managing Director of the IT Investment

This article is a translation of the original post at geektimes.ru/post/265442/
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