Yield Curve Fxf
Yield Curve Fxf is a direct subtype of Yield Curve Input
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TYPE INCLUSION RELATIONSHIPS
AVAILABLE FUNCTIONS
AVAILABLE CREATE FUNCTION KEYS
TYPICAL OBJECTS OF TYPE Yield Curve Fxf
This type represents market rates of fx forward contracts - i.e. objects of type FX Forward - that may be used as input to construct a curve (i.e. an object of type Yield Curve), referred to as TARGET CURVE below.
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Technically, the TARGET CURVE is created by feeding an object of the Yield Curve Fxf type as value next to the key Market Data in the formula that creates the TARGET CURVE
We refer to the curve entered in Src Disc Crv as the source curve and denote its associated currency with SRC whereas the curve being built here is the TARGET CURVE with its associated currency being 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.