FX Forward Money Market Hedge Calculator

Purpose and model boundary

This model calculates the domestic-currency amount locked for a single foreign-currency receivable or payable through a contracted forward, a money-market replication, or a comparison of both. It normalizes reciprocal quote conventions, applies route-specific transaction-cost inputs, and identifies the mechanically preferable cash amount in comparison mode. It is not an executable quote, hedge recommendation, liquidity assurance, or hedge-accounting conclusion.

Inputs and units

The hedge route is forward contract, money-market hedge, or compare both. Exposure direction is foreign-currency receivable or payable. Spot and forward may be entered as domestic currency per foreign unit or foreign currency per domestic unit. Foreign exposure is a positive foreign-currency amount. Domestic and foreign annual rates are fractions with independently entered integer compounding frequencies, and tenor is in years. Transaction costs are basis points of domestic maturity amount. The comparison threshold is an absolute relative deviation.

Only route-relevant inputs are active. A forward-only calculation ignores spot, funding rates, tenor, compounding frequencies, money-market cost, and comparison threshold. A money-market-only calculation ignores contracted forward, forward cost, and comparison threshold. Compare mode activates both routes and the threshold.

Governing relationships

Entered quotes are normalized to domestic currency per foreign unit:

S = entered spot and F = entered forward for domestic-per-foreign quotes

S = 1 / entered spot and F = 1 / entered forward for foreign-per-domestic quotes

For annual rate r, compounding frequency m, and tenor T, the accumulation factor is:

A(r,m,T) = (1 + r/m)^(mT)

The domestic and foreign factors are A_d and A_f. Covered-interest-parity replication gives:

F_CIP = S × A_d / A_f

Upfront domestic funding = foreign exposure / A_f × S

Let s = -1 for a receivable and s = +1 for a payable, and let route cost b be basis points. The cost-adjusted maturity locks are:

Forward lock = exposure × F × (1 + s × b_forward/10000)

Money-market lock = exposure × F_CIP × (1 + s × b_money/10000)

Thus costs reduce a receivable and increase a payable. The route difference is forward lock minus money-market lock. Forward deviation is F/F_CIP - 1; values within 1e-12 are reported as zero.

In compare mode the workbook selects the larger lock for a receivable and the smaller lock for a payable. Values equal within 1e-12 × max(1, both amounts) select the forward amount and label the routes Economically equivalent. Signed selected cash flow is positive for a receivable and negative for a payable.

Calculation sequence

1. Validate selectors, exposure, and only the fields active for the selected route.
2. Normalize each active quote to domestic currency per foreign unit.
3. For an active money-market route, calculate domestic and foreign accumulation, parity forward, and upfront domestic funding.
4. Calculate each active locked maturity amount with direction-specific transaction costs.
5. In compare mode, calculate route difference and parity deviation, then choose the mechanically favorable amount by exposure direction.
6. Report the selected signed cash flow, effective domestic amount per foreign unit, and selected route.
7. Build the locked-amount route comparison chart and evaluate the comparison threshold.

Outputs and interpretation

Normalized spot and forward expose the common quote basis. Implied parity forward is the rate produced by the entered spot and funding assumptions. Route-specific locked amounts are cost-adjusted domestic maturity amounts. Method difference and forward deviation are available only in compare mode. The selected amount and route follow the mechanical rule above; they are not advice. Effective domestic rate is selected amount divided by foreign exposure.

The chart compares only active route amounts. It contains no live market or forecast series.

Validation and status logic

The workbook evaluates status in this order:

Input and derived failures take precedence over the comparison check. The threshold comparison is strict: equality does not trigger CHECK.

Assumptions and limitations

• The foreign exposure is certain and settles once at the entered tenor.
• Borrowing and investing use the same entered rate within each currency.
• Bid/ask, funding, and credit effects enter only through the two user-entered transaction-cost rates.
• There is no holiday calendar, spot lag, broken-date interpolation, cross-currency basis, collateral, capital, liquidity, tax, rollover, option, or counterparty-default treatment.
• Covered interest parity is a simplifying replication identity and may differ from executable market pricing.
• The preferred comparison result is a cash-amount rule, not a recommendation or approval.

Restrictions and non-computing states

Foreign exposure must be 0.01 through 1,000,000,000. Active spot and forward quotes must be 0.000001 through 1,000,000. Active annual rates are -0.95 through 1; tenor is 0.01 through 10 years; active compounding frequencies are whole numbers from 1 through 365; costs are 0 through 10,000 basis points; and comparison threshold is 0 through 1. A reciprocal zero, nonpositive accumulation/parity factor, or nonpositive selected amount prevents a result.

Errors and warnings

This calculator refuses an unknown option, missing visible field, or value outside its allowed range before calculation. Workbook NOT VALID separates active-input failure from nonpositive or nonfinite replication arithmetic. Workbook CHECK means both routes calculated and the forward quote exceeded the entered parity-deviation threshold. A connection or calculation-service failure is not an unhedged or zero-value cash flow.

Quote-convention and public exchange-rate context follows the Federal Reserve H.10 Foreign Exchange Rates; no H.10 observation is embedded. Covered-interest-parity context follows the BIS article Covered Interest Parity, FX Swaps and Cross-Currency Swaps. The workbook independently implements the replication identity and embeds no market feed or proprietary curve.