The change in fair value of a foreign currency forward contract designated as a cash flow hedge with hedge effectiveness based on changes in
forward rates is currently recognized in other comprehensive income.
(7) By using Jensen's Inequality, we show that
forward rates cannot be expected to be unbiased estimators of corresponding future spot rates for both buyers and sellers of the same forward currency contracts.
We recommend a different methodology for projecting future cash flows: a mark-to-market approach that calculates the plan's expected future interest-crediting rates using implied
forward rates from the Treasury yield curve.
After having knowledge of the
forward rates curve of Diebold and Li (2006), the spot rate for a zero-coupon with expiration in Tau can be determined as the weighted average of the
forward rates, and in this point we do the following derivation based on the original work.
In contrast, the data on
forward rates, which are not given to short-lived swings, vary less.
For example, one year
forward rates on coupon swaps are about 25 basis points higher than the current spot rate of about 161.
It however, fails to account for changing
forward rates when hedging successive income/expense streams.
Fed Funds Curves using Fed Funds basis spreads versus LIBOR rates meet the need for separate forecasting and discounting curves for pricing collateralised OTC derivatives with USD cash flows, while Smooth Forward Curves provide better pricing accuracy and more precise risk measurement by smoothing any spikes in
forward rates using the Monotone Convex Spline method.
The three-month
forward rates are given: 0.5171-0.5202.
When researchers tested for cointegration between spot and
forward rates they found [s.sub.t+1] and [f.sub.t] to be cointegrated for almost every currency and time period studied, e.g., Baillie and Bollerslew, (14) Hakkio & Rush and Copeland.
st and [f.sub.t/t-1] are the current spot and
forward rates with a maturity of t at t-1.