Working with FX Contracts In This Chapter

Working with FX Contracts In This Chapter FX Contracts At a Glance....................................................... 112 Understanding FX Contracts.................................................... 113 Working with Forward FX Contract Investments.................................... 115 Working with Forward Cash Investments.......................................... 118 How Geneva Interpolates Forward Prices and FX Rates.............................. 122

6 Working with FX Contracts FX Contracts At a Glance 1 Set 2 Record up FX contract investments. Learn how to set up the investments Geneva uses to record spot and forward FX contracts. See Understanding FX Contracts on page 113. forward FX transactions. Learn the two ways to record forward FX contracts, distribute them to multiple portfolios, and record owner actions for them. See Working with Forward FX Contract Investments on page 115. See Working with Forward Cash Investments on page 118. 3 Interpolate forward FX rates. Learn how Geneva interpolates forward prices and FX rates. See How Geneva Interpolates Forward Prices and FX Rates on page 122. 112

Working with FX Contracts 6 Understanding FX Contracts You use the Spot FX transaction to record spot FX contracts (also called currency trades or foreign exchange), that is, a portfolio exchanging one currency (medium of exchange) for another on the trade date. To access this transaction, choose Transactions Financing and Hedging Spot FX. Geneva provides two ways to record forward FX contracts, which exchange one currency for another at a fixed FX rate on a set date in the future. Open this investment Forward FX Contract With this transaction Buy If you use this investment, you must define A separate investment for each forward FX contract that you enter between two currencies, with a given settlement date. Forward Cash Forward FX Only one investment for each currency for which you set up forward contracts, and re-use that investment for every contract between those currencies. These investments also differ in how you enter the market forward FX rates that Geneva uses to calculate unrealized gain/loss for them. Note: In Geneva, the currency exchange in a forward contract occurs on the contract s settlement date. In addition, forward contracts have a spot date, which is the date when Geneva uses the spot FX rate, rather than the forward FX rate, to determine the contract s unrealized gain/loss. This is typically two days before the contract s settlement date. Pricing Forward FX Contracts In order to calculate the unrealized gain/loss for a forward FX contract on a given date, Geneva must compare the forward FX rate in the contract with the forward FX rate on the valuation date, with a forward period that matches the number of days remaining on the contract. For example, Geneva needs a 45-day forward rate to be able to value a contract with 45 days remaining. For You enter forward rates For details, see Forward FX Contracts priced directly As prices for the Forward FX Contract in a spot price list. Pricing Forward FX Contracts Directly on page 116. Forward FX Contracts priced indirectly, and Forward Cash In forward price lists. Pricing Forward Cash on page 119. You enter forward FX rates in forward price lists the same way that you enter spot FX rates, that is, as a price for one currency denominated in another currency. You enter these FX rates for the currencies themselves, not for the Forward FX Contract or Forward Cash investments. Entering these FX rates in forward price lists indicates to Geneva to treat these as forward FX rates, with a forward interval equal to that of the price list. Understanding FX Contracts 113

6 Working with FX Contracts If the portfolio s price schedule does not have a forward price list whose forward interval matches the number of days remaining on the contract, Geneva can interpolate the necessary forward FX rate from the rates that are available in the price schedule. For details, see How Geneva Interpolates Forward Prices and FX Rates on page 122. Details in Help price lists, defining To set up a forward price list 1 Choose Define Prices Price Type, and create a forward price type for each type of forward FX rate that you want to store. Enter an ID and description for the price type, and then specify its forward day count by selecting an interval type (days, weeks, months, or years) and an interval length (the number of days, weeks, months, or years) (Example: 30 days). 2 Assign the forward price type to a price list that will store forward FX rates of that type. 3 Assign the forward price list to a price schedule for portfolios that hold forward FX contracts. Make sure that the price schedule includes forward price lists for all the forward day counts that you want to use to price your forward FX contracts (Examples: 30-day, 60- day, 90-day, 180-day). 4 Assign the price schedule to the accounting parameters of portfolios that hold forward FX contracts. 5 Enter forward FX rates for each Forward Cash s underlying currency commodity in the appropriate forward price list. For example, if, for a given date, you have 30-day, 60-day, 90-day USD/EUR forward FX rates, enter the 30-day forward FX rate in the 30-day price list, the 60-day forward FX rate in the 60-day price list, and the 90-day forward FX rate in the 90-day price list. Do not enter prices for Forward Cash investments. Calculating Unrealized Gain/Loss for Non-Book Forward FX Contracts To calculate the unrealized gain/loss on a forward FX contract where neither of the currencies in the contract is the book currency, Geneva first multiplies the amount of the buy currency by the spot FX rate on the trade date between the buy and book currencies, to find the book cost of the buy currency. Geneva assigns this same book currency cost to the sell currency in the contract. Then, to calculate the book market value of each leg of the contract on a given date, Geneva looks up or interpolates the forward FX rate for that date for the contract s remaining days, between the buy and sell currencies and the book currency. Geneva then uses those FX rates to determine the book market value of each leg. The difference between each leg s book market value and its book cost is the book unrealized gain. Example: On 01/01/2008, you open a 90-day forward FX contract, buying 100,000 euros (EUR) for 146,000 Canadian dollars (CAD) in a U.S. dollar (USD) portfolio. Geneva looks up 114 Understanding FX Contracts

Working with FX Contracts 6 the EUR/USD spot exchange rate (1.47), and calculates that the book cost of each leg is $147,000. On 01/30/2008, with 60 days left on the contract, you run a report to see the unrealized gain on the contract: Currencies 60-day forward rate Market value Unrealized gain/loss EUR/USD 1.472 EUR 100,000 x 1.472 = $147,200 $147,200 - $147,000 = $200 CAD/USD 1.006 CAD -146,000 x 1.006 = -$146,876 $147,000 - $146,876 = $124 Total: $200 + $124 = $324 For information on how Geneva looks up and interpolates forward FX rates, see How Geneva Interpolates Forward Prices and FX Rates on page 122. Working with Forward FX Contract Investments Details in Help Forward FX Contract investments, defining You use Forward FX Contract investments to record forward FX contracts if you want to be able to enter specific forward FX rates on any pricing date in order to be able calculate unrealized gain/loss on the contract. In addition, Geneva interpolates forward FX rates for Forward Contract investments slightly differently than it does for Forward Cash investments. For details, see How Geneva Interpolates Forward Prices and FX Rates on page 122. Working with Forward FX Contract Investments 115

6 Working with FX Contracts A Closer Look at Setting Up Forward FX Contract Investments You must set up a separate Forward FX investment for each forward FX contract that you enter for a given currency pair, with a given settlement date. You can reuse these investments in different portfolios, or for different trade dates, as long as all of the contracts are for the same two currencies and have the same settlement date. To set up a Forward FX Contract investment, choose Define Investments Forward FX Contract. A B C D E F H The local basis and pricing currencies are typically the same as the book currency of the portfolio that holds the contract. I The currency that the portfolio buys through the transaction. Reports treat this leg of the contract as receivable. J The currency that the portfolio uses to purchase the buy currency. Reports treat this leg of the contract as payable. K Select this check box if you enter prices for the buy and sell currencies on every date when you will price the contract. For details, see Pricing Forward FX Contracts Directly on page 116. If you clear this check box (the default), Geneva interpolates the forward FX rates for dates for which you have not entered prices. L The contract s spot and settlement dates. M For contracts that you do not price directly, you can specify the calendar for the buy and sell currencies. Geneva uses the non-business days in these calendars (in addition to those in the forward FX contract s calendar) to calculate the length of the forward interpolation period. For details, see How Geneva Interpolates Forward Prices and FX Rates on page 122. Pricing Forward FX Contracts Directly If you select a Forward FX Contract investment s Price Directly check box, you enter prices for the investment, which Geneva uses to determine the unrealized gain/loss for the contract on the pricing date. These prices typically come from an outside source, such as a custodian. On each pricing date, you must enter two prices for the Forward FX Contract, one denominated in the investment s buy currency, and one in its sell currency. Each price is the forward FX rate between the denomination currency (the buy or sell) and the Forward FX Contract investment s pricing currency (typically the portfolio s book currency), for a forward FX contract whose day count is the same as the days remaining on the contract that you hold. You enter these FX rates in spot price lists, rather than forward price lists. Note: If the Forward FX Contract investment s pricing currency differs from the portfolio s book currency, you must also enter a spot FX rate between these currencies on the pricing date. 116 Working with Forward FX Contract Investments

Working with FX Contracts 6 Example: On 01/01/2008, in a U.S. dollar portfolio, you open a 90-day forward FX contract that buys euros and sells Swedish krona. You create a Forward FX Contract investment, EURSEK, with local basis and pricing currencies of USD, buy currency of EUR, and sell currency of SEK. To be able to value this contract on 03/01/2008, you must enter two prices for it in one of the portfolio s price lists: Investment Denomination Date Price This price is the EURSEK SEK 03/01/2008 0.1695 SEK/USD forward FX rate for the contract. EURSEK EUR 03/01/2008 0.683 EUR/USD forward FX rate for the contract. Note: These prices are the forward FX rates for a 30-day contracts that opens on 03/01/2008. If you clear the Price Directly check box, Geneva values the investment using the method described in the section Pricing Forward Cash on page 119. Opening Forward FX Contract Investments To open a forward FX contract using a Forward FX Contract investment, you use a Buy transaction. Note: You cannot receive, deliver, or transfer Forward FX Contract investments. Working with Forward FX Contract Investments 117

6 Working with FX Contracts A Closer Look at Buying a Forward FX Contract Investment When you enter a Forward FX Contract in a Buy transaction, the following fields appear. You can enter any two of the Contract FX Rate, Buy Amount, and Sell Amount values, and Geneva will calculate the third value. B A C D E A (Read-only) These fields display the Forward FX Contract s spot and settlement dates. Geneva automatically closes the transaction on its settlement date. B For Geneva Fund Accounting only. C (Read-only) These fields display the Forward FX Contract s buy and sell currencies. D Enter the forward FX rate between the buy and sell currencies. E Enter the amounts of the buy and sell currencies. Working with Forward Cash Investments Details in Help forward cash investments, defining You use Forward Cash investments and Forward FX transactions to record forward FX contracts if you want Geneva always to interpolate the forward FX rates on any pricing date in order to be able calculate unrealized gain/loss on the contract. In addition, Geneva interpolates forward FX rates for Forward Contract investments slightly differently than it does for Forward Cash investments. For details, see How Geneva Interpolates Forward Prices and FX Rates on page 122. You must set up only one Forward Cash investment for each currency for which you set up forward contracts. To set up a Forward Cash investment, choose Define Investments Forward Cash. You define its local basis and pricing currencies as the currency for which the investment represents a forward contract. For example, to set up a Forward Cash investment to use in U.S. dollar forward FX contracts, use U.S. dollars as its local basis and pricing currency. You can also specify whether the investment requires Section 1256 treatment or not. 118 Working with Forward Cash Investments

Working with FX Contracts 6 Pricing Forward Cash To price a forward FX contract that you opened with a Forward FX transaction, Geneva looks for the forward FX rates between the local basis currencies of the two Forward Cash investments involved in the Forward FX transaction. (Note: Geneva uses this same method for Forward FX Contracts that you do not price directly, using the two currencies in the contract.) If the Valuation date occurs on or after the transaction s spot date Days remaining on the contract matches the forward day count of one or more price lists in the portfolio s price schedule Geneva Uses the spot FX rate on the valuation date, as described in How Geneva Stores Historical FX Rates on page 29. Searches for a forward FX rate in the forward price lists, in the same way that it looks for a spot FX rate, as described in For details, see How Geneva Stores Historical FX Rates on page 29. If Geneva cannot find a forward FX rate, it will attempt to interpolate a forward FX rate, as described in the procedure How Geneva Interpolates Forward Prices and FX Rates on page 122. If Geneva cannot find a spot or forward FX rate, it interpolates a forward FX rate. For details about how Geneva Determines the number of days remaining on a forward contract See Understanding Valuation Methods on page 123. Interpolates forward FX rates How Geneva Interpolates Forward Prices and FX Rates on page 122. Details in Help Forward FX transaction Opening Forward Cash Investments To open a forward FX contract using a Forward Cash investment, you use a Forward FX transaction. To access this transaction, choose Transactions Financing and Hedging Forward FX. When you enter an FX transaction in Geneva, you can: Specify Both investments to exchange One investment and either the direct or indirect FX rate To have Geneva calculate the Exchange rate. Amount of the second investment. Forward FX transactions have a trade date and a settlement date, as well as a spot date. The spot date is the date when Geneva uses the spot FX rate, rather than the forward FX rate, to determine the contract s unrealized gain/loss. This is typically two days before the contract s settlement date. For Geneva to calculate unrealized gain/loss on an open Forward FX transaction (between trade date and settlement date), you must create forward price lists and enter forward FX Working with Forward Cash Investments 119

6 Working with FX Contracts rates. Geneva prices the buy and sell forward cash amounts, and the difference is the gain/loss on the transaction. For details on creating forward price lists, and on how Geneva looks up or interpolates forward FX rates, see How Geneva Interpolates Forward Prices and FX Rates on page 122. Forward Cash Pending On Spot Date By default, Forward FX transactions remain open until their settlement date, and then settle to cash on that date. If you select the Forward Cash Pending On Spot Date check box in Systemwide Functional Settings, however, Forward FX transactions become pending (payable or receivable) on their spot date. Distributing Hedging Transactions You can use Geneva s transaction distribution utilities to enter Spot FX or Forward FX transaction in multiple portfolios or groups of portfolios. Details in Help Look up the transaction s name in Geneva s Help index. To distribute a hedging transaction 1 Create a model transaction: The General tab of a transaction distribution utility has most of the fields that the corresponding transaction screen has. The exceptions are portfolio, strategy, buy and sell amounts, which you enter as part of the allocation process (step 2). Note: If you enter miscellaneous revenues or expenses associated with the distribution, Geneva applies the full amount of each expense or revenue item to each of the distributed transactions. 120 Working with Forward Cash Investments

Working with FX Contracts 6 2 Allocate the model transaction to your portfolios: Use the Allocation Info tab to distribute the model transaction among your portfolios. You enter the portion of the total buy and sell amounts from the General tab to allocate to each portfolio in the distribution. You can use the % field to enter the percentage of these amounts to distribute to each portfolio. You can also: Use allocation group portfolios to distribute the transaction. For details, look up allocation groups, portfolios in the Geneva Help index. Specify a different custodian account than that in the model transaction, as well as a strategy and fund structure (for distributions to strategy or fund portfolios). 3 Click Add to commit the distribution. After you commit it, you can click the Distributed Trans tab to view the transactions distributed to each portfolio. Entering Forward FX Owner Actions Because forward FX contracts that you open with the Forward FX transaction involve two Forward Cash investments, you cannot use the Receive Long, Receive Short, Deliver Long, or Deliver Short transactions to receive them into or deliver them out of a portfolio; nor can you use a Transfer transaction to transfer them between custodian accounts or strategies. Instead, you use the Forward FX Owner Actions screen to perform these tasks. Geneva uses the forward FX rate from the portfolio s price schedule on the date of the owner action to determine the contract s gain or loss on the date of the owner action. Working with Forward Cash Investments 121

6 Working with FX Contracts To enter an owner action for a forward FX contract 1 Choose Transactions Owner Actions Forward FX Owner Actions. 2 Enter the transaction s portfolio, and specify the type of owner action that you wan to enter: DeliverForward, ReceiveForward, or TransferForward. 3 Enter the date of the owner action (Transfer Date, Receive Date, or Deliver Date). Then, for a: Transaction Deliver or Transfer Transfer Receive Enter the Transaction ID of the Forward FX transaction that opened the contract in the Original Tran ID field. Geneva fills in the custodian account, strategy, broker, fund structure, dates, Forward Cash investments, and amounts and FX rate from the original transaction. You cannot edit these fields. New custodian account or strategy. Custodian account, strategy, broker, fund structure, dates, Forward Cash investments and amounts, and the forward FX rate. How Geneva Interpolates Forward Prices and FX Rates Details in Help portfolios, pricing information If you price a forward commodity earlier than its expiration date, or a forward FX contract earlier than its spot date, Geneva uses the forward price or FX rate for the price date from the portfolio s price schedule, if one exists. If not, Geneva interpolates a forward price or FX rate. The method that Geneva uses to interpolate the forward price or FX rate depends on the 122 How Geneva Interpolates Forward Prices and FX Rates

Working with FX Contracts 6 following settings on the portfolio s Pricing tab, and differ slightly between Forward FX Contract and Forward Cash investments. This setting Specifies For details, see Valuation On Interpolation How Geneva calculates the number of days remaining on the contract after the valuation date. Whether the portfolio interpolates using a linear or scientific method. Understanding Valuation Methods on page 123. Understanding Linear Interpolation on page 124 and Understanding Scientific Interpolation on page 125. Understanding Valuation Methods To interpolate a forward price or FX rate, Geneva determines the number of days remaining on the forward contact as of the valuation date. Geneva then looks in the portfolio s price schedule for the forward prices or FX rates that have day counts nearest to the contract s remaining days. The portfolio s Valuation On setting determines how Geneva calculates the days remaining on the valuation date. Valuation On TradeDate Geneva calculates the contract s remaining days as the number of days between the Valuation date and the spot or expiration date. SettlementDate For Forward FX Contracts: The valuation date and the settlement date. For Forward Cash or forward commodities: The spot settlement date and the settlement date. The spot settlement date is valuation date plus a number of days equal to the investment s Settlement Days setting (or the next business day in the investment s business calendar, if this date is not a trading day). For Forward Cash, Geneva uses the Settlement Days setting from the investments local basis currencies. How Geneva Calculates Days Remaining: An Example On 03/02/2000, you run a report on a 60-day forward FX contract with a settlement date of 04/10/2000, and spot date of 04/06/2000 (two business days earlier). The Forward Cash investments in the transaction have a Settlement Days setting of 2. You have 30-day and 60- day forward price lists. For a report date of 03/02/2000, Geneva determines the contract s days remaining as follows: TradeDate: 35 days from the valuation date (03/02/2000) to the spot date (04/06/2000). SettlementDate. for a Forward FX Contract: 39 days from the valuation date (03/02/2000) to the settlement date (04/10/2000). SettlementDate, for ForwardCash: Geneva adds 2 days to 03/02/2000 which is 03/04/2000, but this day is a Saturday, so the spot settlement date is the next business day, 03/06/ 2000. Geneva then calculates 35 days remaining from the spot settlement date to the settlement date (04/10/2000). How Geneva Interpolates Forward Prices and FX Rates 123

6 Working with FX Contracts Finding the Bracketing Rates and Anchor Dates After you find the days remaining on the contract, you must next find the bracketing rates (or prices) to use. These are the forward FX or spot rates whose forward intervals are closest to the days remaining. Example: A portfolio s price schedule has spot, 30-day forward, 60-day forward, 90-day forward, 180-day forward, and 360-day forward price lists. To price a forward FX contract with 45 days remaining, Geneva interpolates a 45-day forward FX rate using the 30-day and 60-day forward FX rates. To price a forward FX contract with 15 days remaining, Geneva interpolates a 15-day forward FX rate using the spot (0-day forward) FX rate and the 30-day forward FX rate. Note: For SettlementDate interpolation of a Forward FX Contract only, Geneva counts back from the settlement date a number of business days equal to the Forward FX Contract s Settlement Days setting, and uses the number of days between that date and the valuation date to determine which forward FX rates to use. Example: On 07/25/2008, you run a report on a Forward FX Contract with a settlement date of 08/25/2008, and a Settlement Days setting of 2. Geneva treats this contract as having 31 days remaining. However, in order to find the bracketing rates, Geneva counts back 2 business days from 08/25/2008, to 08/22/2008, which is 28 days before the valuation date. As a result, Geneva uses the spot (0-day) and 30-day forward rates and the spot rate to interpolate a 28-day forward FX rate, rather than using the 30-day and 60-day forward FX rates to interpolate a 31- day forward FX rate. Next, Geneva also finds the anchor dates for these rates. The anchor date is the date a number of business days forward from the valuation or spot settlement date, depending on the Valuation On setting. Geneva uses the actual number of calendar days between the valuation or spot settlement date and the anchor dates in its interpolation formulas. Valuation On TradeDate SettlementDate, Forward FX Contract SettlementDate, Forward Cash or forward commodity To find a forward FX rate s anchor date, Geneva Adds the forward FX rate s forward interval to the valuation date. If the resulting date is not a business day, the anchor date is the next business day. Adds the forward FX rate s forward interval, plus the Forward FX Contract s Settlement Days setting, to the valuation date. If the resulting date is not a business day, the anchor date is the next business day. Adds the forward FX rate s forward interval to the spot settlement date. If the resulting date is not a business day, the anchor date is the next business day. Understanding Linear Interpolation Geneva uses the following formula to perform linear forward FX interpolation. d prior ( r next r prior ) r prior + ------------------------------------------------ d 124 How Geneva Interpolates Forward Prices and FX Rates

Working with FX Contracts 6 Where r prior r next d d prior Represents the Forward rate for the earlier anchor date. Forward rate for the later anchor date. Number of days between the anchor dates. Number of days between the spot date (for trade date valuation) or the settlement date (for settlement date valuation) and the earlier anchor date. Linear Interpolation: An Example On 03/05/2000, you run a report, using TradeDate interpolation, on a 60-day forward FX contract with a settlement date of 04/10/2000, and spot date of 04/06/2000 (two business days earlier, and 32 days after the report date). You have 30-day and 60-day forward price lists; the 30-day list has a forward FX rate of 2.0; the 60-day list has a forward FX rate of 3.0. Geneva determines that the two anchor dates are 04/04/2000 (30 days after the price date, and 2 days before the spot date) and 05/04/2000 (60 days after the price date, and 30 days after the prior anchor date). Geneva interpolates the forward rate as: 2.0 + ((2 x (3.0-2.0))/30) = 2.0 + (2/30) = 2.0 +.067 = 2.067 Understanding Scientific Interpolation Geneva uses the following formula to perform scientific forward FX interpolation. 10 logr prior + ( d d prior ) ( logr next logr prior ) ----------------------------------------------------------------------------- d next d prior Where r prior r next d d prior d next Represents the Forward rate for the earlier anchor date. Forward rate for the later anchor date. Number of days remaining on the contract. Number of days between the valuation date and the earlier anchor date. Number of days between the valuation date and the later anchor date. How Geneva Interpolates Forward Prices and FX Rates 125

6 Working with FX Contracts Scientific Interpolation: An Example Example: Geneva prices a forward contract with 18 days remaining. The spot FX rate is 2.0. The 30-day forward rate is 3.0. Geneva interpolates the 18-day forward rate as follows: 10 ( 18 0) ( log3.0 log2.0) log2.0 + ------------------------------------------------------------------ 30 0 = 10 0.407 = 2.55 = 10 18 ( 0.477 0.301) 0.301 + ------------------------------------------------ 30 Direct and Triangulated Forward FX Rates When Geneva retrieves forward FX rates to use in interpolating a forward FX rate, the price schedule specifies whether Geneva should prefer a direct rate, or the rate whose forward day count is closest to the length of the interpolation period. Select Direct Rate (default) Closest Dates To have Geneva use A direct rate in preference to a triangulated rate, even if the triangulated rate s forward day count is closer to the length of the interpolation period. The rate whose forward day count is closest to the length of the interpolation period, regardless of whether it is a direct or triangulate rate. Direct vs. Triangulated FX Interpolation: An Example Geneva needs a 40-day forward FX rate between JPY and EUR. On the valuation date, the price schedule has a: JPY/EUR spot rate. JPY/USD 30-day forward rate, and an EUR/USD 30-day forward rate. JPY/EUR 60-day forward rate. If you select: Direct Rate, Geneva uses the JPY/EUR spot rate in the interpolation. Closest Dates, Geneva triangulates the 30-day forward JPY/EUR rate, which is closer to 40 days forward than the spot rate. 126 How Geneva Interpolates Forward Prices and FX Rates