Thursday, August 13, 2009

value-dates of T/N + common FX fwd deals

(Suppose today is Monday.)
T/N (tom/next): near (value) date is tomorrow, far (value) date is the-day-after, meaning Wed. Wed is actually today + 2 biz day = T+2. Wed is actually the standard "spot-value-date" of Monday. All spot trades (except CAD) on Mon uses Wed as spot-value-date.
 
S/N (spot/next): near (value) date is spot value date (T + 2!!), far (value) date is the day after, meaning Thu

O/N (overnight): near (value) date is today, far (value) date is tomorrow ! Unbelievable? See below

Note the standard value-date of a standard Monday spot trade is Wed but T/N and O/N Forward outright deals are deals “for value before spot” with value-dates before Wed. The quote convention is special. Here's the reasoning.

) Suppose T/N points are quoted lower/higher like "EUR/USD T/N outright 0.56/0.58", then we know for sure base currency (EUR) is rising.
) We also know that the trend is 100% sure to continue for the next 2 biz days thanks to interest rate differential.
) We know that base currency will appreciate from value tomorrow to value spot. Note Monday's spot-value-date is Wed.
) Spot quotes (value T+2 i.e. value Wed) are available everywhere. T/N forward outright quote is always computed based on spot rates i.e. value T+2 rates. Therefore in our example EUR "value tomorrow" is cheaper than EUR "value spot" i.e. value Wed. We need to __subtract__ the forward points from spot quotes
) If value spot (actually value Wed) E/U is 1.2345/1.2347, then E/U value tomorrow is computed as 1.2345-0.000058/1.2347-0.000056. When subtracting, always subtract more from the bid.

+ If you deal T/N forward outright on a Thu, then the transaction would be “value Friday”, i.e. value date of the transaction is Friday. Is there's a far-date in a forward outright deal? I don't think so.
+ If you deal T/N FX swap on Thu, then the near value-date would be tomorrow (Friday), and the far value-date Monday

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