Before You Start

Before you use the Pricing Center for Forward Contracts, you must:

• Consider the Mathematics, for the forward pricing process at your installation.
• Review the Days to Maturity Offset, which control the number of days offset used when interpolating forward points.
• Manage the Static Demand, for FX rates as required to fulfill the pricing of forward contracts and explained in Chapter 4: Using Pricing Center For Exchange Rates.
• Invoke the Forward Pricing Calculation, to explain how you establish the PRICE table in the SECURITY database for forward contracts using validated spot rates and forward points.

Considering the Mathematics

There are several considerations involving the mathematics used in the calculation of prices for forward contracts, including:

• When calculating the forward price and there are no forward points for the currency combination, Eagle Accounting uses the spot rate to price the forward security.
• If you have a forward position in a currency that does not have forward points available but does have a spot rate available, Eagle Accounting values the position at zero.

To resolve the mathematics of the Eagle Accounting calculations, you can set up the forward contract as a spot rate contract and cause the forward to price based on the exchange rate.

Eagle Accounting Forward Price Calculation Example

Assuming a forward contract has a Settlement/Maturity Date equal to 1/20/2009 with Days to Maturity equal to 15 days, using best FX rates for 1/5/2009 to price the contract as of 1/5/2009, for rates:

• Spot Rate: 6.79090
• 7-Day Rate: -0.00045
• 30-Day Rate: -0.00215
• 60-Day Rate: -0.0049
• 90-Day Rate: -0.0088
• 180-Day Rate: -0.0245
• 270-Day Rate: -0.0427
• 360-Day Rate: -0.0620

The price calculation for the security:

= spot + lower bound point + ((upper bound point - lower bound point) * (((days to maturity - valuation date) - lower bound days) / (upper bound days - lower bound days))
= 6.79090 + (-0.00045) + ((-0.00215 - (-0.00045)) * ((15 - 7) / (30 - 7))
= 6.789859

The Days to Maturity is calculated based on number of actual days between Settlement/Maturity Date and valuation date. The Days to Maturity calculation is affected by the Days to Maturity Offset and the Pricing Calendar. The days offset value is used at the currency combination level (such as, "GBP to USD offset of 2 days"). The days offset effectively pushes out the valuation date. In the example above, a 2 day offset value would cause the Days to Maturity calculation to reduce from 15 days to 13 days.

For example, assuming a Settlement/Maturity Date equal to 1/20/2009 with a days offset equal to 2 days, the calculated Days to Maturity now equals 13 days.

The new price calculation for the security:

= 6.79090 + (-0.00045) + ((-0.00215 - (-0.00045)) * ((13 - 7) / (30 - 7))
= 6.790007

Calendar Considerations

You can designate a business calendar to use with Pricing Center, to force the calculation of the Days to Maturity to start only on a valid business day. For example, if the Days to Maturity Offset is set at 2 days and the pricing day falls on a Friday, then two days offset means the calculation starts on Tuesday (treating the weekend as non-business days) and the total days offset is effectively 4 days. The Days to Maturity calculation equals 11 days (= 15 minus 4).

= 6.7909 - 0.00045 + ((-0.00215 + 0.00045)) * ((11 - 7) / (30 - 7))
= 6.790154

Reviewing the Days to Maturity Offset

To review the Days to Maturity Offset for interpolating forward prices:

Click Days to Maturity Query within the FX Center > Admin menu tree and review the Days Offset option for a given effective date and from currency. Refer to Figure 118.

Figure 118: List of Days to Maturity Records with Days to Maturity Entry Dialog Box

To change an entry for a specific From Currency/To Currency combination, right-click Change the Maturity Day and the Days to Maturity Entry dialog box appears as shown above. To delete an entry for a specific From Currency/To Currency combination, right-click Remove the Maturity Day and the Confirm dialog box appears. Refer to Figure 119.

Figure 119: Remove the Maturity Day - Confirm Dialog Box

Click Yes to delete the record. Otherwise, click No to exit without removing the record.

Managing the Static Demand for FX Rates

Analysts must manage the demand for FX rates needed to complete the pricing of forward contracts. You must add the foreign exchange rate demand for spots and forward points when the static list does not include these FX rate combinations. The following shows the Add Demand dialog box for defining a vendor spot and forward point request, as used for the FX Rates module. Refer to Figure 120.

Figure 120: FX Center - Add Demand Dialog Box

See the section, Managing Vendor Demand for FX Rates in Chapter 4: Using Pricing Center For Exchange Rates for details about maintaining static demand lists on the FX_RATES_DEMAND table in the SECURITY database for a given vendor source.

Invoking the Forward Pricing Calculation

Analysts and managers can trigger the calculation of prices for forward contracts once the best FX rates are available. From the Pricing Center, on the Tools menu, click Forward Pricing³. The Forward Pricing dialog box appears. Refer to Figure 121.

Figure 121: Forward Pricing Dialog Box

Enter the Target Source, Target Rate Date to price, the From Currency and To Currency. You can optionally select an Entity to restrict pricing to forwards within a specific portfolio. Click Submit to price all forwards in the data warehouse. The Eagle Accounting event calculates and stores a forward rate and derives the unrealized gain/loss for all selected forward contracts.

Setting Up Best Data Rules for Forward Contracts

There are no Best Data rules for forward contracts because you do not specifically create demand for forward securities. You demand FX rates and then use the calculated best rates to price the forward securities.

When the FX rates are available and best rates have been calculated, the FX confirmation record posts to the FX_CONFIRMATION table of the SECURITY database. You can post the confirmation record manually or automatically⁴. The presence of the confirmation record enables the use of the Forward Pricing option on the Tools menu to price forward contracts.

Workflow for Forward Contracts

The daily workflow for pricing of forward contracts is controlled by analysts and management by tracking iterations of several important events, including the request of FX rates from vendors required for forward contracts, the validation of vendor files with the demanded spots and points, the calculation of final spot rates and points which assign best rates to target sources, and the overall supervision of the daily cycle using the workflow tools of the Pricing and FX Center.

The overall supervision of the daily cycle consists of monitoring the daily pricing process for exceptions, resolving exceptions, and releasing best rates for use in the pricing of forward contracts. Forward contract prices are required for portfolio valuation and can be used by downstream systems.

Pricing Center analysts have several duties, including:

• Following the several best FX rates duties explained in Chapter 4: Using Pricing Center For Exchange Rates, including the review, modification, and approval of exchange rates data and the rollback/copy forward functions needed to manage current FX best rates.
• Reviewing the status of calculated prices for Forward Contracts for accuracy and completeness.

Managers can audit actions of analysts and monitor the daily pricing cycle for completion and accuracy using Forward Price History and Forward Price Audit reports.

Reviewing the Status of Forward Contracts

Analysts can review the status of forward contract prices using the target source, which identifies the calculated forward prices. For clients obtaining prices from vendors, you can review the status of forward contract prices using the original source, which identifies the transmitting vendor.

Original Source Vendor

To review the status of original source vendor prices when transmitted from a vendor, click Security Summary within the Derivatives > Original Source tree. The Security Summary/ Original Source dialog box appears. Refer to Figure 122.

Figure 122: Forwards Security Summary / Original Source Dialog Box

Complete the Security Summary query panel, selecting the specific effective date of interest. You can use the Advanced Mode⁵ to enter a date range. You can search on primary asset ID using standard asterisk (*) wildcard notation. You can select Best Prices or All Prices. Click Search and the Security Summary query results appear.

Target Source Vendor

To review the status of target source vendor prices, click Security Summary within the Derivatives > Target Source tree. The Security Summary/ Target Source dialog box appears. Refer to Figure 123.

Figure 123: Forwards Security Summary / Target Source Dialog Box

Complete the Security Summary query panel, selecting the specific effective date of interest. You can select Best Prices or All Prices. Click Search and the Security Summary query results appear.

Auditing Online Activities

Managers can use the audit reporting function within Pricing Center to audit the actions of analysts by viewing detailed information about all field changes made to and actions taken on a forward security contracts or list of securities at the target source level.

Audit

To audit forwards pricing, click Audit within the Forward > Original Source or Target Source tree. The Audit dialog box appears. Refer to Figure 124.

Figure 124: Forwards Audit / Target Source Dialog Box

Enter the target source and date range of interest for valuation. Click Search to generate the Audit report. The Audit report exists for only the Target Source reporting level of Pricing Center.

There are several details available on the report of interest to the auditing of forward contract price changes and actions by analysts, including:

• Current Value: the value of the field after the change for this update date and time.
• Previous Value: the value before the change was applied. Compare the current and previous values to determine the change.
• Update Date: date and time the update occurred for the field on this security.
• Update Source: user ID of the analyst changing this field.