Foreign Exchange Rates

Foreign exchange rates express the value of 1 currency in terms of another. Exchange rates change reflecting the relative supply and demand of individual currencies which in turn reflects the relative flows of trade and investment between countries.

Foreign Exchange Spot Rates

The following matrix illustrates the percentage change in each pair of global foreign exchange rates over the selected span.

Foreign Exchange Forward Rates

Forward foreign exchange rates express the relationship between current and future foreign exchange rates based on differences in each currencies local interest rates.

Under covered interest parity, an borrwer (or equivalently an investor) should be indifferent between investing in local current (at the rate ) or investing in foreign currency (at the rate ) after adjusting for the ratio of the spot exchange rate ( incurred at the beginning of the period when converting the domestic/sell currency to foreign/buy currency) and the inverse of the forward exchange rate ( incurred at the end of the period when converting principal and interest back to the local currency).

The non-arbitrage forward exchange is therefore the spot exchange rate adjusted by the ratio of interest rates between the two currencies:

Sell 1 and buy:

Foreign Exchange Forwards

For the holding span selected above, with the foreign currency position of Sell 1 and buy the FX rates over the full period:

Currency Carry Gain

The carry trade gain, is the percentage benefit realised by leaving a FX position unhedged. It is calculated as the percentage difference between the forward exchange forward at commencement and the spot rate at maturity. That is, for an foreign currency investment, if the current depreciates more than is implied by the interest rate differences over the holding period, a currency convesion at maturity would imply a loss relative to using the rate locked in by the foreign currency forward, leading to a carry gain.