Providing you are a LUSID user with sufficient access control permissions, you can create an instrument to model a foreign exchange or currency forward contract ("FxForward") in the LUSID instrument master. You can then:
- Book a transaction in a portfolio to record a purchase of the contract (that is, establish a position)
- Value your position at any time using different models
- Examine the exposure of that position in combination with your other holdings
- Roll the contract or monitor it until maturity and automate the process of booking cash settlements.
Note: If you are the LUSID domain owner, you are automatically assigned the built-in lusid-administrator role, which has all the permissions necessary to perform the operations in this article.
You can model either a:
- Standard FxForward: the exchange of two quantities of two different currencies at a specified date and time.
- Non-Deliverable Forward (NDF): the payment of a settlement amount based on the the exchange rate between two different currencies and amounts at a specified date and time.
This article focuses on modelling a standard FxForward. There is also an accompanying Jupyter Notebook that demonstrates many of the concepts and operations.
Note: It is possible to represent a foreign exchange contract in LUSID without creating an instrument, by booking a forward-settled cash transaction in a different settlement and transaction currency. However, we recommend creating an FxForward instrument encapsulating the currency amounts and booking a unitised transaction instead, as described in this article.
LUSID's instrument model is designed with reference to ISDA CDM and FpML, and FxForwards constitute an integral part of this instrument model.
To create an instrument modelling an FxForward, call the LUSID UpsertInstruments API and specify a definition with an instrumentType of FxForward, a domestic (base currency) amount, a foreign (quote currency) amount, and start and maturity dates. For more information on constructing a suitable economic definition, examine the API documentation and choose FxForward from the dropdown box:
For example, providing you have a valid API access token, you could run the following command in your LUSID domain to create an FxForward instrument representing an obligation to buy 1,000,000 Euros at a cost of 1,200,000 USD on 15 May 2022 (that is, 6 months from the instrument start date, at a strike rate of 1.2):
Note the following:
- domCcy is the base currency and domAmount the quantity to buy or sell of that currency (in our example, we are buying +1,000,000 Euros in 6 months from the start date).
- fgnCcy is the quote currency and fgnAmount the amount to pay or receive in that currency (in our example, we are paying -1,200,000 USD in 6 months).
Providing the request is valid, the response contains an automatically-generated LUID (a system ID, in this case LUID_00003D58) that is guaranteed to be unique and never change. You can use this LUID to reference the instrument in subsequent API calls:
Once the instrument is mastered, you can call the LUSID UpsertTransactions API to record a purchase of the contract in a particular portfolio.
As mentioned above, FxForwards should be created with the currency amounts encapsulated in the instrument, and the transaction itself unitised (that is, with the units set to 1 and the cost to 0):
Note this transaction uses the built-in StockIn transaction type rather the built-in Buy, since there is no cash outlay. However, you could define your own custom transaction type to represent FxForward purchases if you wish.
You can confirm your position at any time by calling the LUSID GetHoldings API with the appropriate LUID:
You can value your position against actual or estimated exchange rates at any time, and calculate the notional profit or loss (that is, the amount you have gained or lost by virtue of having entered into the fixed rate contract, relative to not having done so). You might do this to comply with IAS 39 or other hold-to-maturity accounting treatments (that is, without discounting, which is a separate treatment that is not discussed further in this article; contact Technical Support for more information).
In the example above, we are obliged to buy 1,000,000 Euros at a cost of 1,200,000 USD in 6 months from the instrument start date, which means the strike rate is 1.2 and each Euro costs 1.20 USD. If we value the contract after 3 months (bear in mind it started out as a 3 month obligation) and the current spot exchange rate has increased to 1.3, then you would expect LUSID to show your position with a notional profit of 100,000 USD, since you have ‘saved’ this amount by fixing the forward rate. On the other hand, if the spot exchange rate has decreased to 1.1, then you would expect LUSID to show a notional loss of 100,000 USD.
Loading market data into LUSID
You must first load suitable market data into LUSID. This can be:
- Dated pips or fixed exchange rates loaded into the Quote store. Each pip or rate should be upserted with a LUSID Instrument Id (LUID) of the form <domCcy>/<fgnCcy>/FxFwdRate/<YYYYMMDD>, where the date matches the maturity date of the FxForward contract to which it applies. In our example, the maturity date of the EUR/USD contract is 15 May 2022, so we might load a rate for 5 Jan 2022 as follows:
- An FxForward curve loaded into the Complex Market Data store; see section 4.2 of the accompanying Jupyter Notebook for a demonstration. This enables you to value the contract without having to specify an exact date; LUSID can interpolate and extrapolate from the curve to resolve dated forwards.
Creating a valuation recipe
You must create a valuation recipe that specifies which valuation model to use. Choose either:
- SimpleStatic to add your own quotes in for the instrument.
- Discounting to discount each cashflow by a discounting curve for the currency. This model is not discussed further in this article; contact Technical Support for more information.
- ForwardWithPointsUndiscounted to value your position using dated pips, or ForwardSpecifiedRateUndiscounted to value your position using rates loaded into the Quote store, as demonstrated in the previous section.
- ForwardFromCurveUndiscounted to value your position using an FxForward curve loaded into the Complex Market Data store. For a demonstration of creating such a recipe, see section 5 of the accompanying Jupyter Notebook.
Note: By default, a recipe creates a single valuation for your position. Set the produceSeparateResultForLinearOtcLegs flag to True in the recipe to generate separate valuations for each currency leg, as demonstrated in section 5 of the Jupyter Notebook.
Assuming the IAS 39 accounting treatment is preferred, the NAV of the instrument is simply comprised of the P&L difference of the currency legs when the foreign leg is converted back to the reporting currency at the appropriate forward exchange rate. This assumes one leg of the FxForward is in the portfolio currency, and that one leg is the cash amount to be modelled.
If the legs are split for display purposes, the forward cash amounts are displayed in their domestic currency amount.
For a demonstration, see the valuations on Days 1, 2 and 3 in section 6.1 of the accompanying Jupyter Notebook.
LUSID provides an exposure calculation and supports both analytic and bump and valuation mechanisms for assessing risk; contact Technical Support if you need more information.
At some point you must decide whether to roll an FxForward contract or hold it until maturity. Rolling a contract means extending its maturity date; typically, the old contract is closed by setting a holding of zero (with a cash amount booked to reflect the P&L) and a new contract with a longer time to expiry is executed to replace the old. For a demonstration, see section 7.1 of the accompanying Jupyter Notebook.
If you choose to let the contract expire you can monitor your position in several ways:
- Use the Cash Ladder dashboard in the LUSID web app.
- Call the LUSID GetPortfolioCashLadder API directly.
- Schedule a job to create a regular report.
Note that once the maturity date passes your position will drop out of LUSID valuation reports.
When an instrument cashflow or maturity event occurs in LUSID, it's important to note two things:
- The cashflows are assumed to have been paid but are not presently auto-generated as such. This means the instrument or cashflow from the instrument drops out of your valuation. We will shortly implement ‘automatic settlement’, so that you can choose to auto-generate the appropriate cashflow or instrument, link it to the contract or instrument in question, and upsert it to the portfolio.
For now, this must be done manually, using either the Manage Cashflows dashboard in the LUSID web app, or by calling the LUSID GetUpsertablePortfolioCashFlows API, which returns imminent cashflows as upsertable DTOs ready to push into LUSID as transactions. For a demonstration, see sections 7.2 and 7.3 of the Jupyter Notebook.
- An instrument cannot ‘expire’ in LUSID; it is still available post-maturity, although the valuation is 0. If you set your holding to 0, it will no longer appear in reports unless you are deliberately backdating. For a demonstration, see section 7.3 of the Jupyter Notebook.