Created by Dr. Jan-Frederik Mai

On foreign currency equity drift rates

The post-crisis market standard bootstrap of a risk-free rate for a foreign currency typically ensures that interest rate swaps in domestic and foreign currency, as well as cross currency swaps between the two currencies, trade at zero. Whereas the pre-crisis risk-free rate for the foreign currency, which is bootstrapped from only interest rate swaps in the foreign currency, is no longer used for discounting foreign future cash flows, it is still required for the computation of coupon payments resulting from a foreign currency floating rate bond. The present note points out that also for the pricing of an equity derivative based on a foreign currency stock it is reasonable to work with both the post-crisis and the pre-crisis risk-free rates. While the post-crisis risk-free rate is required to discount future cash flows from the derivative, the pre-crisis risk-free rate is required to model the drift of the stock price process. If the drift of the stock price process is (poorly) modeled using the post-crisis risk-free rate, the equity model is inconsistent with the cash market model. For example, it implies non-zero values for an equity forward contract.


Terms & Conditions
Please carefully read our Legal Notices and our Privacy Policy.

In this context, we must draw your particular attention to the following legal conditions:

Neither the information nor the opinions made available on this Website constitute an invitation, offer or recommendation to purchase, sell or otherwise dispose of a financial instruments, nor to make another transaction or to provide investment advice or any other service. Any investment decision relating to one of the products described herein must only be based on the respective sales documents (e.g. sales prospectus, semi-annual or annual reports, key investor information documents etc.).
The products referred to on this website may not be offered in all jurisdictions and may only be purchased by those investors entitled to do so. The information and contents of this website are not addressed to any persons or legal entities whose domicile prohibits the distribution of this information. All persons and legal entities whose domiciles are subject to a foreign jurisdiction should inform themselves about and observe these restrictions.

The information on this website is not addressed to the USA. US nationals, legal entities and persons with residence in the USA may not access this website. The information on this website may not be distributed or passed on in the USA. Xaia products referred to on this website will not be registered under the United States Securities Act of 1933 and no approval has been obtained in compliance with the US Commodities Exchange Act of 1936. Xaia products listed on this website may not be offered or sold in the USA either to citizens, or to US residents, or to legal entities domiciled in the USA.

The disclaimer confirmation of visitors to this website is stored as a necessary cookie on your device, is valid for a period of 90 days, however this can be reset at anytime by deleting your browser’s cookies.  For further information, please see our Privacy Policy.

Please provide your origin.
Please tell us whether you are an institutional or a private investor.
You have to agree, in order to use our online presence.