Contents. 1. Introduction Workbook Access Copyright and Disclaimer Password Access and Worksheet Protection...

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2 Contents 1. Introduction Workbook Access Copyright and Disclaimer Password Access and Worksheet Protection Macros Colour Coding Recalculation Explanation of Individual Worksheet Models Problems and Feedback... 5 Worksheet 1: Interest Rate Interpolation... 6 Worksheet 2: Certificate of Deposit... 8 Worksheet 3: Discount Instrument Worksheet 4: Repurchase Agreement Worksheet 5: Forward Interest Rate Worksheet 6: FRA Hedge Worksheet 7: Futures Hedge Worksheet 8: Swap Pricer Worksheet 9: FX Cross Rates Worksheet 10: Manufactured FX Forward Worksheet 11: FEC with FX Swap Worksheet 12: FX Points Interpolation Worksheet 13: Fwd-Fwd FX Swap Worksheet 14: NDF Settlement Worksheet 15: Time Option Worksheet 16: Interest Arbitrage Worksheet 17: Duration Worksheet 18: Currency Option Calculator... 52

3 1. Introduction The models in the workbook DC Models - version 1.2 have been designed to assist candidates in their preparations for the ACI Dealing Certificate Exam. These models permit candidates to test their understanding of the various calculations required by ACI Education in the Exam. Some of the models perform calculations that are not required during the Exam, but have been provided to allow the candidates to observe some practical examples, in order to assist their understanding of the relevant theory. In all cases, the information below regarding each model will indicate whether the calculations form part of the Exam. N.B. During the Exam, candidates are required to use a suitable financial calculator for calculations and are not permitted access to Excel or any other spreadsheet software. 2. Workbook Access The Excel workbook containing the models can be located on the Peter Skerritt & Associates Online Testing System under Certifications/ACI Dealing Certificate New Syllabus/Topic Tests/Additional Material. Access to these models is, therefore, restricted to our registered ACI Dealing Certificate candidates. 3. Copyright and Disclaimer All of the spreadsheet models are copyright protected as the intellectual property of Peter Skerritt & Associates. Candidates may download a copy of the DC Models workbook and this User Guide, but may not copy these or pass them to any other individual or entity. When first accessing the workbook, candidates are required to indicate their understanding and acceptance of our Copyright and Disclaimer by ticking the appropriate box. 3

4 4. Password Access and Worksheet Protection The spreadsheet models are all subject to password protection, with limited modification ability, as explained below see Colour Coding. Please note that the password to access the workbook is: Distinction1! This password will allow you to open and operate the workbook, but will not permit modification of individual worksheet elements or allow you to change the structure of the workbook. 5. Macros The workbook does not contain any macros, in order to avoid user security issues. 6. Colour Coding All of the worksheets have been designed according to the following system of colour coding for the different cells: These cells contain rubric which explains the content of the adjacent cells and cannot be modified. These cells contain formulae which cannot be modified. These cells contain dropdown boxes, from which limited selections can be made. These cells cannot be modified. These cells require inputs for the respective calculations, as explained below. 7. Recalculation All of the models have been set to manual recalculation. Accordingly, you should firstly insert the required inputs, as explained below, and then press the function key F9 to recalculate the outputs. 4

5 8. Explanation of Individual Worksheet Models A detailed explanation of the inputs and outputs of each of the worksheet models is provided in the following pages. 9. Problems and Feedback Please contact the Programme Director, Emil Nysschens, regarding any problems with the models and/or feedback you wish to provide. emil@peterskerritt.com 5

6 Worksheet 1: Interest Rate Interpolation 1. Overview This model uses linear interpolation to calculate the interest rate for a term (B), which is located somewhere between a shorter term (A) and a longer term (C). 2. Inputs C3: The interest rate for Term A, inserted as an annualised percentage, e.g. insert 10 for 10%. C4: The number of days in Term A. C5: The interest rate for Term C, inserted as an annualised percentage, e.g. insert 10 for 10%. C6: The number of days in Term C. C7: The number of days in Term B. 6

7 3. Outputs C8: The interpolated annualised interest rate for Term B. 7

8 Worksheet 2: Certificate of Deposit 1. Overview This model calculates the proceeds at maturity and secondary market proceeds for a Certificate of Deposit, with a maximum tenor of 1 year. It also calculates the accrued book value, capital gain or loss and holding period return. 2. Inputs C4: The face value of the instrument in millions, e.g. insert 100 for 100 million. 8

9 C5: The term of the instrument in days, when first issued. C6: The coupon rate of the instrument, inserted as an annualised percentage, e.g. insert 4 for 4%. C7: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C10: The annualised yield at which the paper is sold/bought in the secondary market. C11: The remaining term of the instrument in days, from when it is sold/bought in the secondary market. 3. Outputs C8: The proceeds at maturity. C12: The secondary market value on the date implied in cell C11. C14: The accrued book value at the date implied in cell C11. C15: The capital gain or loss, assuming a sale at the date implied in cell C11. C17: The holding period return, from issue date to the date implied in cell C11, expressed as an annualised yield. 9

10 Worksheet 3: Discount Instrument 1. Overview This model calculates the primary and secondary market prices of a discount security such as a Treasury Bill, for a maximum tenor of 1 year. It also calculates the accrued book value, capital gain or loss and the holding period return. 2. Inputs C4: The face value of the instrument in millions, e.g. insert 100 for 100 million. 10

11 C5: The term of the instrument in days, when first issued. C6: The interest rate of the instrument, inserted as an annualised percentage, e.g. insert 4 for 4%. C7: The type of interest rate, i.e. select Yield or Discount. C8: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C11: The interest rate at which the instrument is sold/bought in the secondary market, inserted as an annualised percentage, e.g. insert 4 for 4%. C12: The type of interest rate at which the instrument is sold/bought in the secondary market, i.e. select Yield or Discount. C13: The remaining term of the instrument in days, from when it is sold/bought in the secondary market. 3. Outputs C9: The initial purchase price of the instrument. C14: The secondary market value on the date implied in cell C13. C16: The accrued book value at the date implied in cell C13. C17: The capital gain or loss, assuming a sale at the date implied in cell C13. 11

12 C19: The holding period return, from issue date to the date implied in cell C13, expressed as an annualised yield. 12

13 Worksheet 4: Repurchase Agreement 1. Overview This model calculates the purchase and repurchase prices of classic repos and sell/buy backs, with or without a haircut and/or a coupon payment on the collateral. 2. Inputs C3: Type of repurchase agreement, i.e. select Classic or Sell/Buy. C4: Market value of collateral in millions, e.g. insert 50 for 50 million. C5: Haircut as a percentage, i.e. insert 10 for 10%, or 0 if no haircut. C6: Repo rate of interest as an annualised percentage, e.g. insert 5 for 5%. 13

14 C7: The term of the repurchase agreement in days. C8: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C9: The amount of any coupon payment on the collateral during the term of the agreement, in millions, e.g. insert 0.25 for 250,000, or 0 if no coupon payment. C10: The number of days after the start of the agreement when a coupon payment is made on the collateral. N.B. If no coupon payment is made on the collateral during the term of the repurchase agreement, it is irrelevant which number is inserted in this cell, as this will not affect the calculations. 3. Outputs C11: The initial purchase price of the agreement. C12: The repurchase price of the agreement. 14

15 Worksheet 5: Forward Interest Rate 1. Overview The top portion of this model calculates forward-forward interest rates from cash rates. The second portion shows the yield curve of forward interest rates plotted against the yield curve of the cash rates, from which they are derived. 2. Inputs Forward Interest Rate Calculator C3: Interest rate for the longer period as an annualised percentage, e.g for 8.46%. C4: Term in days of the longer period. C5: Interest rate for the shorter period as an annualised percentage, e.g for 8.46%. 15

16 C6: Term in days of the shorter period. C7: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. Forward Curve C11 to C22: Hypothetical cash interest rates for the respective periods as annualised percentages, e.g for 1.10%. Please insert whichever rates you choose. 3. Outputs Forward Interest Rate Calculator C8: Implied forward interest rate for the forward period between cells C6 and C4. Forward Curve C11 to C22: Implied forward interest rates for the respective periods. 16

17 Worksheet 6: FRA Hedge 1. Overview This model calculates the effective interest rate for a forward-starting borrowing or investment, which is linked to a future floating rate (e.g. LIBOR) plus/minus a margin and hedged with a Forward Rate Agreement (FRA). The model can also be used simply to calculate the net settlement of a FRA, ignoring any underlying exposure to interest rates. The worksheet also contains a data table showing the effective borrowing/investment rate achieved, given a range of possible values for the future floating interest rate. N.B. If the underlying loan/deposit has been perfectly hedged, the effective rate should be equal to the fixed rate of the FRA in cell C15 plus/minus the margin in cell C8, regardless of the future floating rate. This can also be seen in the associated graph. 2. Inputs C3: The type of underlying transaction being hedged, i.e. select loan (borrowing) or deposit (investment). 17

18 C4: The principal amount of the loan or deposit in millions, e.g. insert 100 for 100 million. C5: The term of the forward period in days. C6: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C8: The interest margin above/below the floating rate, expressed as an annualised percentage. C11: The FRA position, i.e. buy or sell. N.B. If a loan is being hedged, select buy and, if a deposit is being hedged, select sell. C12: The notional principal of the FRA in millions, which should match the number in cell C4. C13: The term of the FRA in days, which should match the number in cell C5. C14: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C15: The FRA fixed rate. F4: The realised value of the future floating rate (e.g. LIBOR, EURIBOR etc.) as an annualised percentage, e.g. insert 5 for 5%. You may insert any rate you wish here. 18

19 3. Outputs C7: The realised future floating rate, which is linked to cell F4 and which is used to calculate the loan/deposit interest. C9: The interest payable/receivable on the underlying loan/deposit. C16: The realised future floating rate, which is linked to cell F4 and which is used to calculate the settlement amount of the FRA. C17: The discounted net settlement of the FRA. C18: The undiscounted net settlement of the FRA. N.B. Although FRAs are settled on a net discounted basis, this undiscounted amount makes the FRA settlement cash flow directly comparable to the interest on the underlying loan/deposit, which is settled on an undiscounted basis, i.e. at the end of the forward period. C20: Interest on loan/deposit. C21: Undiscounted FRA settlement cash flow. C22: Net cash flow between cells C20 and C21. C23: The effective annualised interest rate of the loan/deposit, based on the net cash flow in cell C22, the principal in cell C4, the term in cell C5 and the day base in cell C6. 19

20 Worksheet 7: Futures Hedge 1. Overview This model calculates the effective interest rate for a future borrowing or investment that is linked to a future floating rate (e.g. LIBOR), plus/minus a margin, and hedged with a Short- Term Interest Rate Futures Contract (STIR). N.B. Since the futures contract expires in 20 days time, it is assumed that the interest rate of the future underlying loan/deposit is also determined on that date and matches the settlement rate used to calculate the futures Exchange Delivery Settlement Price (EDSP). The model can also be used simply to calculate the net profit or loss of a STIR, ignoring any underlying exposure to interest rates. The worksheet simulates the daily closing prices of the futures contract in order to demonstrate the daily variation margin cash flows. The associated graph shows the price changes of the futures contract over the 20 day period from when the position is opened until expiry. If the underlying loan/deposit has been perfectly hedged, the effective rate in cell C21 should be equal to the rate implied in the opening price of the STIR (cell C14) plus/minus the margin in cell C7, regardless of the future floating rate. 20

21 2. Inputs C3: The type of underlying transaction being hedged, i.e. select loan (borrowing) or deposit (investment). C4: The principal amount of the loan or deposit in millions, e.g. insert 100 for 100 million. C5: The term of the forward period in days. N.B. If the term of the forward period is not exactly a quarter of a year, i.e. 90 days for a 360 day base or days for a 365 day base, the futures hedge will not be perfect, as these contracts are based on a forward period of precisely this term. In such instance, there is basis risk in the hedge and the effective rate in cell C21 will fluctuate, depending on the futures EDSP. Try it! C6: The day base/annualised basis for the relevant currency, e.g. select 360 for USD and 365 for GBP. C7: The interest margin above/below the floating rate, expressed as an annualised percentage. C11: The number of futures contracts traded, inserted as a positive number irrespective of whether these contracts are bought or sold. The number of contracts multiplied by the notional principal per contract should equal the principal of the underlying loan or deposit. For example, if the underlying principal in cell C4 is 100, i.e. 100 million, and the currency is USD, the number of Eurodollar futures traded should be 100, since the notional principal per contract is USD 1 million. N.B. Take care when calculating the required number of contracts for Short Sterling (notional principal GBP 500,000) and Euroyen (JPY 100,000,000). C12: The futures position, i.e. buy (long) or sell (short). N.B. If a loan is being hedged, select sell and, if a deposit is being hedged, select buy. 21

22 C13: The point value of the contract, e.g. select 25 (USD 25) for Eurodollar futures. C14: The opening price at which the futures contracts are bought/sold. J4: The realised value of the future floating rate as an annualised percentage, e.g. insert 5 for 5%. This will then determine the final closing price of the futures contract on the expiry date (day 20), known as the Exchange Delivery Settlement Price (EDSP). You may insert any rate you wish here, but if it is very different to the rate implied in the futures closing price on day 19, expect a big change in the futures price on day 20 and a resulting large variation margin cash flow. 3. Outputs C8: The realised future floating rate expressed as an annualised percentage, which is linked to cell J4. C9: The interest payable/receivable on the underlying loan/deposit. C15: The final closing price of the futures (EDSP), based on the realised floating rate in cell J4. C16: The net amount of the daily variation margin cash flows. C18: Interest on loan/deposit. C19: The profit or loss on the futures position, i.e. the net amount of the daily variation margin payments in cell C16. C20: The net cash flow between cells C18 and C19. 22

23 C21: The effective annualised interest rate of the loan/deposit, based on the net cash flow in cell C20, the principal in cell C4, the term in cell C5 and the day base in cell C6. 23

24 Worksheet 8: Swap Pricer 1. Overview This model calculates the fixed rate of a 2-year quarterly-reset Interest Rate Swap (IRS) against a 3-month floating interest rate. The swap rate is calculated according to the noarbitrage principle known as The Law of Equivalent Value see below. N.B. ACI Dealing Certificate candidates are not required to calculate IRS prices and this model is provided for interest only. 2. Inputs B4 to B11: These cells contain the principal amount of the swap in millions, at each of the reset dates. N.B. For a vanilla swap, these amounts are constant. For an amortising or accreting swap, however, these amounts will decrease or increase over time. D4 to D11: These cells contain the number of days in each of the respective 3-monthly periods, e.g. 90, 91 etc. 24

25 E4: This cell contains the current 3-month cash money market interest rate expressed as an annualised percentage, e.g. insert 0.30 for 0.30%. E5 to E11: These cells contain the forward interest rates for the respective periods expressed as an annualised percentage, e.g. insert 0.30 for 0.30%. N.B. In practice, these rates would be obtained from the implied money market forwardforward calculations, or from the relevant FRA rates if available. C13: The day base/annualised basis for the relevant currency, i.e. select 360 for USD and 365 for GBP. 3. Outputs F4 to F11: These are the spot discount factors for each of the respective periods and forward rates. These are required to calculate the present values of the fixed and floating cash flows in columns G and H. G4 to G11: Using the spot discount factors above, these cells contain the present value of the respective future floating rate payments of the swap, estimated by reference to the current forward rates in column E. H4 to H11: Using the spot discount factors above, these cells contain the present value of the respective fixed rate payments of the swap, calculated by reference to the fixed swap rate in cell D15. D14: This cell contains the fixed rate of the swap using a closed-form approximation. This will only be precise if the number of days in each of the periods is exactly a quarter of a year (90 or days, depending on the day base of the currency). D15: This cell contains the precise fixed rate of the swap, based on the equivalence of the sum of the present values of the fixed and floating legs of the swap see cells G13, H13 and G14 below. 25

26 G13: This cell contains the sum of the present values of the floating leg payments. H13: This cell contains the sum of the present values of the fixed leg payments. G14: This cell contains the net of G13 minus H13. N.B. The fair value of the fixed rate of the swap, i.e. ignoring any margin for the market maker, should be at a level which leads to the value in cell G14 equalling zero. To find this rate, proceed as follows: Click on cell G14 Click on Data on the worksheet Toolbar Click on What-If Analysis under Data Tools Select Goal Seek Set cell G14 to value 0 by changing cell D15 26

27 Worksheet 9: FX Cross Rates 1. Overview This model calculates the spot and forward outright exchange rate between two currencies (Leg 1 and Leg 2), given their rates against a common currency, which will normally be the US dollar. The model also calculates the swap points of the required cross rate. The worksheet contains 3 different rules for calculating cross rates, depending on how the currencies in the two legs are quoted: Rule 1 The base currencies are different in the two legs and so are the two quoted currencies. Rule 2 The base currencies are the same in the two legs. Rule 3 The quoted currencies are the same in the two legs. 27

28 2. Inputs Rule 1 C4 and D4: The bid and offer spot rates of Leg 1 respectively. C5 and D5: The bid and offer swap points of Leg 1 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C6: The base currency of Leg 1. C7: The quoted currency of Leg 1. C8 and D8: The bid and offer spot rates of Leg 2 respectively. C9 and D9: The bid and offer swap points of Leg 2 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C10: The base currency of Leg 2. C11: The quoted currency of Leg 2. C14: The desired base currency of the cross rate. C15: The desired quoted currency of the cross rate. 28

29 Rule 2 G4 and H4: The bid and offer spot rates of Leg 1 respectively. G5 and H5: The bid and offer swap points of Leg 1 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as G6: The base currency of Leg 1. G7: The quoted currency of Leg 1. G8 and H8: The bid and offer spot rates of Leg 2 respectively. G9 and H9: The bid and offer swap points of Leg 2 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as G10: The base currency of Leg 2. G11: The quoted currency of Leg 2. G14: The desired base currency of the cross rate. G15: The desired quoted currency of the cross rate. 29

30 Rule 3 K4 and L4: The bid and offer spot rates of Leg 1 respectively. K5 and L5: The bid and offer swap points of Leg 1 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as K6: The base currency of Leg 1. K7: The quoted currency of Leg 1. K8 and L8: The bid and offer spot rates of Leg 2 respectively. K9 and L9: The bid and offer swap points of Leg 2 respectively. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as K10: The base currency of Leg 2. K11: The quoted currency of Leg 2. K14: The desired base currency of the cross rate. K15: The desired quoted currency of the cross rate. 30

31 3. Outputs Rule 1 C16 and D16: The bid and offer of the cross spot rate respectively. C17 and D17: The bid and offer of the cross forward rate respectively. C18 and D18: The bid and offer of the cross swap points respectively. Rule 2 G16 and H16: The bid and offer of the cross spot rate respectively. G17 and H17: The bid and offer of the cross forward rate respectively. G18 and H18: The bid and offer of the cross swap points respectively. Rule 3 K16 and L16: The bid and offer of the cross spot rate respectively. K17 and L17: The bid and offer of the cross forward rate respectively. K18 and L18: The bid and offer of the cross swap points respectively. 31

32 Worksheet 10: Manufactured FX Forward 1. Overview This model calculates the outright forward exchange bid and offer rates of a currency pair using the spot rates and respective money market interest rates, i.e. a manufactured forward. The model also shows the cash flows involved in this method of construction of a forward exchange contract, from the perspective of a market price taker. N.B. The model only calculates rates up to 12 months. 2. Inputs C3 and D3: The bid and offer spot rates of the relevant currency pair, C4 and D4: The bid and offer deposit rates of the base currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. C5 and D5: The bid and offer deposit rates of the quoted currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. C6: The term in days. 32

33 C7: The day base/annualised basis for the base currency, i.e. select 360 for USD and 365 for GBP. C8: The day base/annualised basis for the quoted currency, i.e. select 360 for USD and 365 for GBP. C9: The base currency nominal in millions. 3. Outputs C10 and D10: The forward bid rate calculated as cell H9 divided by cell H8, and the forward offer rate calculated as cell H14 divided by cell H13, respectively. C11 and D11: The bid and offer forward margin calculated as the forward rates in cells B10 and C10 subtracted by the spot rates in cells B3 and C3, respectively. H3; The number of days from the spot date to the maturity date of the forward contract. G6 and G7: The spot cash flows required by a market price taker to create a forward sale of the base currency and purchase of the quoted currency, i.e. the market maker s bid. N.B. The base currency amount has been present valued to ensure that the base currency cash flow on the maturity date is equal to the specified amount in cell B9. G8: The amount of base currency that is borrowed in the money market in order to fund the spot sale of that currency. G9: The amount of quoted currency that is deposited in the money market, equal to the amount purchased in the spot market. 33

34 I8: The amount of base currency to be repaid (principal plus interest) on the forward maturity date. I9: The amount of quoted currency to be received (principal plus interest) on the forward maturity date. G11 and G12: The spot cash flows required by a market price taker to create a forward purchase of the base currency and sale of the quoted currency, i.e. the market maker s offer. N.B. The base currency amount has been present valued to ensure that the base currency cash flow on the maturity date is equal to the specified amount in cell B9. G13: The amount of base currency that is deposited in the money market, equal to the amount purchased in the spot market. G14: The amount of quoted currency that is borrowed in the money market in order to fund the spot sale of that currency. I13: The amount of base currency to be received (principal plus interest) on the forward maturity date. I14: The amount of quoted currency to be repaid (principal plus interest) on the forward maturity date. 34

35 Worksheet 11: FEC with FX Swap 1. Overview This model calculates the FX swap points of a currency pair and the outright forward rate of exchange, for periods up to 12 months. The model also shows the cash flows involved in this method of construction of a forward exchange contract, from the perspective of a market price taker. N.B. This worksheet employs a new colour: grey, to show the cash flows of the FX swaps, and to emphasise that buying a currency spot and simultaneously selling it forward is economically equivalent to one transaction, i.e. borrowing that currency. Similarly, selling a currency spot and simultaneously buying it forward is economically equivalent to one transaction, i.e. investing that currency. 2. Inputs C3 and D3: The bid and offer spot rates of the relevant currency pair. C4 and D4: The bid and offer deposit rates of the base currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. 35

36 C5 and D5: The bid and offer deposit rates of the quoted currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. C6: The term in days. C7: The day base/annualised basis for the base currency, i.e. select 360 for USD and 365 for GBP. C8: The day base/annualised basis for the quoted currency, i.e. select 360 for USD and 365 for GBP. C9: The base currency nominal in millions. 3. Outputs C10 and D10: The bid and offer swap points respectively. C11 and D11: The outright forward bid and offer rates respectively. H3: The number of days from the spot date to the maturity date of the forward contract. G6 and G7: The spot cash flows required by a market price taker to create a forward sale of the base currency and purchase of the quoted currency, i.e. the market maker s bid. G8: The amount of base currency that is bought (borrowed) from the forward trader in order to fund the spot sale of that currency. 36

37 G9: The amount of quoted currency that is sold to (deposited with) the forward trader, equal to the amount purchased in the spot market. I8: The amount of base currency to be sold (repaid) to the forward trader on the forward maturity date. I9: The amount of quoted currency to be bought (received) from the forward trader on the forward maturity date. G12 and G13: The spot cash flows required by a market price taker to create a forward purchase of the base currency and sale of the quoted currency, i.e. the market maker s offer. G14: The amount of base currency that is sold to (deposited with) the forward trader, equal to the amount purchased in the spot market. G15: The amount of quoted currency that is bought (borrowed) from the forward trader in order to fund the spot sale of that currency. I14: The amount of base currency to be bought (received) from the forward trader on the forward maturity date. I15: The amount of quoted currency to be sold (repaid) to the forward trader on the forward maturity date. 37

38 Worksheet 12: FX Points Interpolation 1. Overview This model uses linear interpolation to calculate the FX swap points for a term (B), which is located somewhere between a shorter term (A) and a longer term (C). 2. Inputs C3: The swap points for Term A. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C4: The number of days in Term A. C5: The swap points for Term C. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C6: The number of days in Term C. 38

39 C7: The number of days in Term B. 3. Outputs C8: The interpolated swap points for Term B. 39

40 Worksheet 13: Fwd-Fwd FX Swap 1. Overview This model calculates the FX swap points for a term that starts beyond the current spot date, i.e. a forward-forward FX swap. 2. Inputs C3 and D3: The bid and offer spot rates of the relevant currency pair. C4 and D4: The bid and offer swap points to the near date of the forward period. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C5 and D5: The bid and offer swap points to the far date of the forward period. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as

41 3. Outputs C6 and D6: The bid and offer forward-forward FX swap points. C7: The near date rate of the forward-forward swap bid, i.e. where the forward trader is first selling and later buying the base currency. N.B. As per market convention, this is the mid-rate of the forward outright to the near date of the forward-forward swap. C8: The far date rate of the forward-forward swap bid, i.e. where the forward trader is first selling and later buying the base currency. This is calculated as the near date rate adjusted by the forward-forward swap bid points. D7: The near date rate of the forward-forward swap offer, i.e. where the forward trader is first buying and later selling the base currency. N.B. As per market convention, this is the mid-rate of the forward outright to the near date of the forward-forward swap. D8: The far date rate of the forward-forward swap offer, i.e. where the forward trader is first buying and later selling the base currency. This is calculated as the near date rate adjusted by the forward-forward swap offer points. 41

42 Worksheet 14: NDF Settlement 1. Overview This model calculates the settlement amount for a non-deliverable FX forward (NDF). N.B. The calculation is based on the nominal of the contract being expressed as an amount of base currency. 2. Inputs C3: The contracted rate of the NDF. C4: The base currency position of the contract, i.e. select long or short. C5: The nominal value of the contract in base currency millions. N.B. If the nominal value of the contract is expressed as an amount of counter-currency, first convert this into the equivalent amount of base currency by dividing by the NDF rate. This amount can then be inserted into the model. C6: The fixing rate of the NDF, i.e. the future spot rate against which the NDF settles. 42

43 3. Outputs C7: The settlement amount of the NDF, expressed as an amount of base currency in millions. N.B. If this amount is positive, the position holder specified in cell C4 receives this and, if negative, pays this. 43

44 Worksheet 15: Time Option 1. Overview This model calculates the bid and offer rates for fully and partly optional forward FX contracts. 2. Inputs C3 and D3: The bid and offer spot rates of the relevant currency pair. C4 and D4: The bid and offer swap points to the end of the fixed period of the contract. If the contract is fully optional, these should be inserted as 0. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as C5 and D5: The bid and offer swap points for the full term, i.e. to the maturity date of the forward contract. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as

45 3. Outputs C6 and D6: The bid and offer rates for the fully or partly optional forward contract. 45

46 Worksheet 16: Interest Arbitrage 1. Overview This model calculates the interest rates of synthetic assets and liabilities, created using the money market and a FX swap, for periods up to 12 months. N.B. ACI Dealing Certificate candidates are not required to perform these calculations, and are simply required to understand the effect of different swap points on the synthetic interest rates thus created. 2. Inputs C3 and D3: The bid and offer spot rates of the relevant currency pair. 46

47 C4 and D4: The bid and offer deposit rates of the base currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. C5 and D5: The bid and offer deposit rates of the quoted currency respectively, inserted as an annualised percentage, e.g. insert 3 for 3%. C6: The day base/annualised basis for the base currency, i.e. select 360 for USD and 365 for GBP. C7: The day base/annualised basis for the quoted currency, i.e. select 360 for USD and 365 for GBP. C8: The term in days. C14 and D14: Hypothetical bid and offer swap points. You may insert whichever numbers you wish, in order to see the effect on the synthetic interest rates thus created. N.B. The points should be inserted in the same terms as the exchange rate and with the appropriate sign. For example, EUR/USD points of -55 should be inserted as Outputs C10 and D10: The theoretical bid and offer swap points respectively, implied from the money market interest rates in cells C4, D4, C5 and D5. C11: The interest rate of a synthetic base currency asset, created by swapping an available amount of base currency into quoted currency, i.e. buy and sell quoted currency, and then depositing the quoted currency received from the swap trader in the money market. N.B. It can be seen that the synthetic interest rate thus created is worse than the rate available via a direct money market placement of the base currency. This is because the synthetic methodology involves crossing bid/offer rates. 47

48 D11: The interest rate of a synthetic base currency liability, created by borrowing the quoted currency in the money market, and then swapping this into the base currency, i.e. buy and sell base currency. N.B. It can be seen that the synthetic interest rate thus created is worse than the rate available via a direct money market borrowing of the base currency. This is because the synthetic methodology involves crossing bid/offer rates. C12: The interest rate of a synthetic quoted currency asset, created by swapping an available amount of quoted currency into base currency, i.e. buy and sell base currency, and then depositing the base currency received from the swap trader in the money market. N.B. It can be seen that the synthetic interest rate thus created is worse than the rate available via a direct money market placement of the quoted currency. This is because the synthetic methodology involves crossing bid/offer rates. D12: The interest rate of a synthetic quoted currency liability, created by borrowing the base currency in the money market, and then swapping this into the quoted currency, i.e. buy and sell quoted currency. N.B. It can be seen that the synthetic interest rate thus created is worse than the rate available via a direct money market borrowing of the quoted currency. This is because the synthetic methodology involves crossing bid/offer rates. C15: The interest rate of a synthetic base currency asset, created by swapping an available amount of base currency into quoted currency, i.e. buy and sell quoted currency, and then depositing the quoted currency received from the swap trader in the money market. N.B. Depending on the hypothetical swap points inserted, the synthetic interest rate thus created may be better or worse than the rate available via a direct money market placement of the base currency. D15: The interest rate of a synthetic base currency liability, created by borrowing the quoted currency in the money market, and then swapping this into the base currency, i.e. buy and sell base currency. N.B. Depending on the hypothetical swap points inserted, the synthetic interest rate thus created may be better or worse than the rate available via a direct money market borrowing of the base currency. 48

49 C16: The interest rate of a synthetic quoted currency asset, created by swapping an available amount of quoted currency into base currency, i.e. buy and sell base currency, and then depositing the base currency received from the swap trader in the money market. N.B. Depending on the hypothetical swap points inserted, the synthetic interest rate thus created may be better or worse than the rate available via a direct money market placement of the quoted currency. D16: The interest rate of a synthetic quoted currency liability, created by borrowing the base currency in the money market, and then swapping this into the quoted currency, i.e. buy and sell quoted currency. N.B. Depending on the hypothetical swap points inserted, the synthetic interest rate thus created may be better or worse than the rate available via a direct money market borrowing of the quoted currency. 49

50 Worksheet 17: Duration 1. Overview This model calculates the price and Modified Duration (MD) of a fixed income instrument. The worksheet also displays graphs of the change in MD given a change in the coupon rate of the instrument and the term. N.B. Dealing Certificate candidates are not required to calculate bond prices or MD, but simply to understand how MD is affected by changes in the coupon rate and term of an instrument. 2. Inputs C3: The current cash market settlement date of the instrument. Please insert a date using the Excel Date function in the following format: YYYY/MM/DD. For example, the 20 th of July 2014 should be inserted as: =date(2014,07,20). 50

51 C4: The term of the instrument in years. C5: The coupon rate of the instrument, inserted as an annualised percentage, e.g. insert 5 for 5%. C6: The yield-to-maturity of the instrument, inserted as an annualised percentage, e.g. insert 5 for 5%. C7: The redemption value of the instrument per 100 of face (par) value, which is normally given as 100. C8: The frequency of the coupon payments: insert 1 for annual, 2 for semi-annual, 4 for quarterly. C9: The day count basis of the bond: insert 1 for Actual/Actual, 2 for Actual/360, 3 for actual/365, 4 for European 30/ Outputs C10: The maturity date of the bond, calculated as the settlement date plus the term. C11: The current price of the bond per 100 of face (par) value. C12: The MD expressed in years. N.B. The larger this number, the greater the change in the price of the bond for a given change in the yield-to-maturity. 51

52 Worksheet 18: Currency Option Calculator 1. Overview This model calculates the premium, time value, intrinsic value and key Greeks for Europeanstyle options on a number of major currency pairs. The model also displays a chart of the option delta against a range of spot exchange rates. N.B. ACI Dealing Certificate candidates are not required to calculate the premium, time value, intrinsic value or Greeks of options. They are simply required to understand the key inputs to the model and the meaning of these terms. 52

53 2. Inputs C4: The relevant currency pair. C5: Whether the option is a call or put on the base currency. C6: The spot exchange rate. C7: The strike (exercise) price of the option. C8: The implied volatility for the option as an annualised percentage, e.g. insert 10 for 10%. C9: The term of the options in days. C10: The base currency interest rate as an annualised percentage, e.g. insert 10 for 10%. N.B. The model interprets this rate as a continuously compounded zero-coupon interest rate. C11: The quoted currency interest rate as an annualised percentage, e.g. insert 10 for 10%. N.B. The model interprets this rate as a continuously compounded zero-coupon interest rate. C12: The nominal amount of the option in base currency millions. 3. Outputs C14 to C23: These are advanced calculations, required to compute the premium and other outputs, and are not explained further here. 53

54 C24: The term in years, assuming 360 days. C25: The forward rate for the term. N.B. The model interprets interest rates as continuously compounded zero-coupon rates. F4: The option premium expressed in the same terms as the exchange rate, i.e. in quoted currency pips per 1 unit of the base currency. For example, a premium of for a EUR/USD option means USD per every EUR 1 nominal. F5: The option premium expressed as a percentage of the base currency nominal. F6: The premium expressed as a base currency amount of cash. F7: The intrinsic value of the option in quoted currency pips. F8: The time value of the option in quoted currency pips. F9: The (spot) delta of the option as a percentage of the base currency nominal. F10: The gamma of the option as the absolute change in the delta for a 0.01 change in the spot rate. F11: The theta of the option per day in quoted currency pips. F12: The vega of the option for a 1% change in implied volatility, in quoted currency pips. 54

55 F13: The rho of the option for a 1% change in the quoted currency interest rate, in quoted currency pips. 55