Open FX Forwards: Introducing a Standard Mark-to-Model Approach

14 Pages Posted: 2 Mar 2019

See all articles by Martin Hölbl

Martin Hölbl

Western Union International Bank GmbH

Goran Lovric

Western Union International Bank GmbH

Date Written: February 12, 2019

Abstract

This paper focuses on the mark-to-model valuation of open foreign exchange (FX) forwards, a popular instrument for hedging FX exposures with higher degree of flexibility with respect to settlement date and settlement amount compared to (standard) closed forwards. While there is sufficient coverage of valuation models and risks of closed FX forwards in literature (see e.g. Hull 2012), we observe limited or no coverage on open forwards in spite of the increasing utilization of those hedging instruments globally. The paper introduces a standard mark-to-model approach for open FX forwards in dependence of the window period of the open FX forward, with the model being tested using swing-option pricing methods based on the Longstaff-Schwartz algorithm (Longstaff and Schwartz, 2001) as well as forward-based pricing approaches (Hull (2012), Jorion (2010)).

To our knowledge, this is the first paper focusing on mark-to-model valuations of open FX forwards within the framework of a stochastic model.

Keywords: Open Forward, Monte Carlo Simulation, Risk Management, Hedging, Swing Options

JEL Classification: G13, G21

Suggested Citation

Hölbl, Martin and Lovric, Goran, Open FX Forwards: Introducing a Standard Mark-to-Model Approach (February 12, 2019). Available at SSRN: https://ssrn.com/abstract=3333174 or http://dx.doi.org/10.2139/ssrn.3333174

Martin Hölbl

Western Union International Bank GmbH ( email )

Schubertring 11
Vienna, 1010
Austria

Goran Lovric (Contact Author)

Western Union International Bank GmbH ( email )

Schubertring 11
Vienna, 1010
Austria

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