What do you Know About Foreign Exchange Date Conventions?

In foreign exchange markets, when trading currency options in a particular currency pair there are four key dates that are to be considered:

Horizon: Horizon is referred to as the date on which the trade originates (usually today)
Spot: Spot is referred to as that date on which the initial transfer of funds takes place
Expiry: Expiry is referred to as that date on which instrument expires
Delivery: Delivery is referred to as that date on which the final transfer of funds generated from the maturity of the instrument takes place

We can summarize these dates on the following timeline:

Calculating Spot Dates

Whenever the spot date has to be calculated then for this purpose the horizon date (T) is used. Below are the two possible cases:

If the currency pair is USD/CAD then Spot is T+1 day. In this case T+1 must be a business day and also it should not be a US holiday. If an unacceptable day is encountered, then move forward one day and it has to be tested again.
Otherwise Spot is T+2 days. It is must that each currency should be considered within the pair separately in order to calculate T+2. There must be one clear working day between the horizon date and the spot date, for USD and there must be two clear working days between the horizon date and the spot date, for all non-USD currencies.

Also, no money clears on US holidays, in all cases, what it means is that neither spot nor delivery can take place.

Calculating Expiry and Delivery Dates

Usually time to expiry is quoted either as “overnight” or in terms of a number of days, weeks, months or years. Explaining generally, the expiry date can be any weekday, it doesn’t matter if it is a holiday in one, or both of the currencies, except 1 January. Depending on the period involved There are differing conventions:

forex conventions

Overnight: If we talk about overnight trades, then the expiry date is the next week-day day after the horizon date, and in the same way as spot is calculated from the horizon date, the delivery date is calculated from the expiry date. The result of this will be in the form of an expiry date that is before the spot date.
Days and Weeks: If we talk about a trade that is having a time to expiry of v days, then the expiry date is the day v days ahead of the horizon date (unless it is a weekend or 1 January, because in that case the date is rolled forward to a weekday) and if we talk about a trade that is having time to expiry of x weeks, then the expiry date is the day 7x days ahead of the horizon date (having the same conditions as above). Then just as the spot date is calculated from the horizon date, delivery date is calculated from the expiry date.

Months

If we talk about a trade having time to expiry of y months, then in order to find the expiry date first the spot date is calculated, then y months are move forward from the spot date to the delivery date. If in case the delivery date is a non-business day or a US holiday, then move forward until an acceptable delivery date is found. Finally, the expiry date is calculated by using an “inverse spot” operation; e.g., find such an expiry date for which the delivery date would be its spot. When you are finding the expiry date from the delivery date, you must keep in mind that there must be one clear business day and one weekday (not including 1 January) in any applicable non-USD/non-CAD currency.

Years

If we talk about a trade having time to expiry of z years, then in order to find the expiry date first the spot date is calculated, then z years are moved forward from the spot date to the delivery date. If in case the delivery date is a non-business day or a US holiday, then move forward until an acceptable delivery date is found. Finally, the expiry date is calculated by using an “inverse spot” operation; e.g., find such an expiry date for which the delivery date would be its spot. When you are finding the expiry date from the delivery date, you must keep in mind that there must be one clear business day and one weekday (not including 1 January) in any applicable non-USD/non-CAD currency.

Special Cases

Below are given two special cases that are involving trades that take place around the end of the month and we are trading in month multiples. One defines “target month” to lie x months forward from spot if it is having time to expiry of x months; e.g., if in February, and it is having the time to expiry of three months, then the target month is May.

If in case the spot date falls on the last business day of the month in the currency pair then by convention the delivery date is defined to be the last business day of the target month e.g. Let us assume that all days are business days: if spot is at 30 April, a one month time to expiry will make the delivery date 31 May. This case is described as trading “end-end”.
If in case the spot date falls before the end of the month but the resultant delivery date is after the end of the target month then by convention the delivery date is defined to be the last business day of the target month. For example, let us assume all days are business days: if the spot date is 30 January, a one month time to expiry will make the delivery date 30 February however, as this date doesn’t exist so the expiry date becomes 28 February (in a non-leap year).

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