Foreign Exchange Markets and Currency Forwards › Key Parameters
Michael BrenndoerferNovember 14, 20251 min read
Quantitative FinanceAll chapters Part 3 of 15Forwards, Futures, and Options
Foreign Exchange Markets and Currency Forwards › Key ParametersOne section · Sections in this chapter9 / 12 ↓
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The key parameters for currency forward pricing and valuation are:
- S: Current spot exchange rate (domestic per foreign). The base variable for all currency derivatives.
- F: Forward exchange rate. Determined by interest rate parity conditions.
- r_d: Domestic interest rate. Used in the numerator of the IRP formula.
- r_f: Foreign interest rate. Used in the denominator of the IRP formula.
- T: Time to settlement in years. Scales the interest rates.
- K: Contracted forward rate. The rate agreed upon in the forward contract, used for mark-to-market valuation.
- N: Notional amount of the contract. The principal amount exchanged.