Forums  > Pricing & Modelling  > Pricing an FX FVA (Forward Vol Agreement)  
Page 1 of 1
Display using:  


Total Posts: 1
Joined: Jan 2023
Posted: 2023-01-21 18:09
I really need some help on this one - we have a USDJPY FVA on our portfolio (3y5y), however our PM states that it is being massively undervalued by the 3rd party admins and by the internal system - he states that the arithmetic fwd fwd vol is undervaluing the trade because, in this case, the USDJPY and the interest rates used to determine the forwards (i.e. USD Rates given JGBs are pegged) are highly correlated. Because of this Correlation the USDJPY Spots are more volatile than the forwards so as US Rates go up, USDJPY goes up and the swap gets wider so the FWD hasnt moved as much. He then says that because of this USDJPY FVAs trade at a premium to the fwd-fwd levels and that Id rather own 5 discrete 1y fvas then own a 5y vol from spot.

So my question is - How does high correlation make USDJPY Spots more volatile than forwards and how does this lead to USDJPY FVAs trading at a premium to the arithmetic fwd fwd? Can someone more clued up than me help? Still pretty new to the FX desk.

Thanks so much it will literally help so much if one of you kind people can advise



Total Posts: 520
Joined: Mar 2005
Posted: 2023-01-21 21:12
I cannot comment on the Forward vol calcs but what I will ask:

the risk taker is stating that the internal and external valuations are wrong and that he knows how to do it? Right.

I've not seen this before.

I remember being a JUB trader being shouted at on the floor by a senior but ignorant trader (yours, mine, shag) and a risk 'manager' about how I was wrong having been asked to look at a bunch of bond and swap trades (booked in summit). I said: "You're long the bond and you've booked a single fixed receive leg in the swap but not the floating pay". It was only an IRS from 2y prior.

Well after half a day it turned out I was right and yours mine shag had wiped out his year's P&L with an unbooked/marked floating leg.

It's just about taking every single dollar...and more.
Previous Thread :: Next Thread 
Page 1 of 1