FX Spot
The exchange rate for near-immediate delivery between two currencies.
Read the contractual cash flows first.
An FX rate is always one currency priced in another; the direction matters before any arithmetic begins.
The exchange rate for near-immediate delivery between two currencies.
Express payoff and present value precisely.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Make conventions part of the contract.
Contract dates, calendars, settlement, notionals and payoff currency are part of the valuation input.
Discounting and projection conventions must match the collateral and quotation framework.
The displayed payoff omits legal terms and lifecycle events unless stated otherwise.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Locate the quote and replication instruments.
Anchor for forwards, swaps, options and cross-currency exposures.
Map cash-flow changes into hedge risk.
Reconcile the contractual payoff before reading the FX risk. Small date or convention changes can move cash flows before any model parameter moves.
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