Yield Curve Fxf


Yield Curve Fxf is a
direct subtype of Yield Curve Input with functions Yield Curve Fxf Functions, keys Yield Curve Fxf keys and example object YldCrvFxf that represents market rates of fx forward contracts - i.e. objects of type FX Forward - that may be used as input to a yield curve construction.

Web blog example
here

Technically, the mentioned curve is created by feeding an object of this type as value next to the key
Market Data in the formula that creates the Yield Curve object.

We refer to the curve entered in Src Disc Crv as the source curve and denote its associated currency with SRC and the curve being built here as the target curve and denote its associated currency with TGT
Concretely, an object of type Yield Curve Fxf holds the at-the-money strikes of fx forward contracts between SRC and TGT, with the exact relation specified by a supplied quoting convention.

The SRC discounting curve and the spot fx rate must be supplied as exogenous inputs.

The discount factors of the target curve are constructed in such a way that all these contracts have zero NPV.

Let s be the spot fx rate of TGT/SRC that settles at time T1, which is typically one or two days from today.
Let f be the forward fx rate for the pair TGT/SRC that matures (settles) at the future time T2
The the following equation holds:
f = sPᵗᵍᵗ/Pˢʳᶜ
where
Pᵗᵍᵗ is the unknown target forward discount factor from T1 to T2
and
Pˢʳᶜ is the known source forward discount factor from T1 to T2

Then the respective target discount factor Pᵗᵍᵗ is found with the help of this equation.