Český finanční a účetní časopis 2014(1):6-18 | DOI: 10.18267/j.cfuc.377

Use of Forward Interest Rates and Forward Exchange Rates for the Valuation of Currency-Interest Rate Derivatives

Jaroslav Brada
Doc. Ing. Jaroslav Brada, PhD. - docent; Katedra měnové teorie a politiky, Fakulta financí a účetnictví Vysoká škola ekonomická v Praze, W. Churchilla 4, 130 67, Praha 3; <brada@vse.cz>.

The article describes the procedures by which you can appreciate the potential receivables and payables, whose size depends on interest rates (reference interest rates e.g. 1M USD LIBOR) or reference exchange rates. The article describes the procedure, which enables to estimate price of conditional flows of payments having the character of OTC currency options or interest rate options. The reader is shown procedures for estimating the forward interest rates and forward exchange rates and it is shown how to estimate the forward rate and forward exchange rates used in the valuation of OTC options - European and American (US) currency call and put options, Asian (average) interest rate option, and interest rate option - cap and floor. It is shown how one can make the measurement of a class of so-called interest rate forwards and currency forwards and interest rate futures and currency futures. The mentioned valuation model does not require the use of a binomial or Black-Scholes option pricing model, which greatly simplifies the use of the mentioned valuation procedures in this paper.

Keywords: Interest rate option valuation; Currency option valuation; Exotic option; OTC derivatives; Bond valuation; Forward exchange rates.
JEL classification: G12

Published: March 1, 2014  Show citation

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Brada, J. (2014). Use of Forward Interest Rates and Forward Exchange Rates for the Valuation of Currency-Interest Rate Derivatives. Czech Financial and Accounting Journal, 2014(1), 6-18. doi: 10.18267/j.cfuc.377
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