Circular No. 02/EMO/2021, of April 15 - Formulas for Calculating Forward Exchange Rates and Interest Rates

Banco de Moçambique Administração

PELOURO DE ESTABILIDADE MONETÁRIA CIRCULAR N.º 02/EMO/2021

Maputo, 15 de Abril de 2021

ASSUNTO: FÓRMULAS DE CÁLCULO DAS TAXAS DE CÂMBIO E DE JURO A PRAZO

Given the need to calculate the forward exchange rate for OTC derivative instruments FX Forward and FX Swap (Currency Swap) and Forward Rate Agreement (FRA), pursuant to paragraph 3 of Article 8 of the Regulation on Financial Derivatives in the Over-the-Counter Market Not Cleared by a Central Counterparty, approved by Notice No. 1/GBM/2021 of March 16, the Bank of Mozambique instructs:

A. On the calculation of the exchange rate for FX Forward and FX Swap

1. The forward exchange rate for OTC derivatives FX Forward and FX Swap (Currency Swap) shall be determined based on the following formula: i. $fwd = spot \times e^{(\frac{i_d}{B_d} - \frac{i_b}{B_b}) \times n.º \text{ dias}}$ ii. $pontos \ forward \ ou \ swap = fwd - spot$

Where:

• fwd: forward exchange rate.
• spot: spot buying or selling exchange rate (average spot buying and selling exchange rate, when calculating the forward exchange rate for FX Swap).
• i_d: interest rate of the second currency in the pair.
• i_b: interest rate of the first currency in the pair.
• B_d: annual basis of the second currency in the pair.

Banco de Moçambique Administração

• B_b: annual basis of the first currency in the pair.
• n.º dias: number of days (term).

2. The spot exchange rate, to be used as the basis for calculating the forward exchange rate for FX Forward, must match the buying or selling exchange rate quoted in the foreign exchange market by the financial counterparty for spot transactions, at the time the FX Forward transaction is negotiated.

3. The spot exchange rate, which must be used as the basis for calculating the forward exchange rate for FX Swap (Currency Swap), must result from the simple average of the buying and selling exchange rates quoted by the financial counterparty.

4. The interest rates of the foreign currencies used in FX Forward and FX Swap transactions (i_b and i_d) must, at a minimum, have a regularly calculated series and be subject to public disclosure by international financial information providers.

5. For the purpose of defining the Metical interest rate, the financial counterparty must observe the single index, and may add a risk premium that is null, negative, or positive, provided it does not exceed the spread of the interest rates quoted by the financial counterparty for short-term loans (to companies).

B. On the calculation of the Cross-currency Swap (fixed to fixed)

6. At the inception of the contract, the notional value of the base currency is exchanged for the equivalent value of the quoted currency, calculated based on the spot exchange rate.

7. On the settlement date of the Cross-currency Swap, the reverse transaction is executed based on the initial spot exchange rate, with no interest payment due.

8. Periodic interest payments follow the periods to be defined by the parties.

9. The interest rates to be used for calculating periodic interest must be fixed during the contract term, have a regularly calculated series, and be subject to public disclosure by international financial information providers.

10. The interest rates of the foreign currencies to be used for calculating periodic interest must comply with the provisions of paragraph 4 of this Circular.

Banco de Moçambique Administração

11. The Metical interest rate to be used for calculating periodic interest must comply with the provisions of paragraph 5 of this Circular.

12. Periodic interest must be calculated using the following formula: iii. $JP = \frac{(VN \times n.º \text{ dias} \times i_{\text{periódica}})}{\text{base anual}}$

Where:

• JP: periodic interest;
• VN: notional value;
• n.º dias: number of days (term);
• i_{\text{periódica}}: periodic interest rate agreed upon by the parties (fixed);
• base anual: annual basis according to the currency convention.

13. There is no settlement of the monthly installment by difference, as payments are denominated in different currencies.

C. On the calculation of the interest rate for the Forward Rate Agreement (FRA)

14. The FRA may be calculated in any currency with legal tender status in Mozambique, including the quoted currency.

15. The calculation of the FRA interest rate must be performed using the following formula: $fwd - fwd \ rate = \left( \frac{1 + \frac{i_{\text{período longo}} \times n.º \text{ dias}{\text{período longo}}}{\text{base anual}}}{1 + \frac{i{\text{período curto}} \times n.º \text{ dias}{\text{período curto}}}{\text{base anual}}} \right) \times \frac{\text{base anual}}{n.º \text{ dias}{\text{período do forward-forward}}}$

Where:

• fwd - fwd rate: FRA interest rate.
• n.º dias: FRA period.
• i_{\text{período longo}}: interest rate (i) for the period between the FRA contracting date and its maturity.
• i_{\text{período curto}}: interest rate (i) for the period between the FRA contracting date and its start.

Banco de Moçambique Administração

• n.º dias_{\text{período curto}}: period between the FRA contracting date and its start.
• n.º dias_{\text{período longo}}: period between the FRA contracting date and its maturity.
• n.º dias_{\text{período do forward-forward}}: period between the start of the FRA and its maturity.
• *n.º dias_{\text{período longo}} - n.º dias_{\text{período curto}} = n.º dias_{\text{período do forward-forward}}$
• base anual: number of days in the year, according to the convention used.

16. The interest rates in the formula above correspond to the currency of the notional value used for the transaction.

17. For the purpose of defining the interest rates of foreign currencies, the financial counterparty must comply with the provisions of paragraph 4 of this Circular.

18. For the purpose of defining the Metical interest rate (i), the financial counterparty must observe the single index, and may add a risk premium that is null, negative, or positive, provided it does not exceed the spread of the interest rates for active and passive operations practiced by the financial counterparty for short-term loans (to companies).

19. The calculation of the FRA settlement amount must be performed two business days before the FRA start date, and its settlement must be made by difference on the FRA start date.

20. The FRA settlement amount must be calculated based on the following formula: $\text{Montante de liquidação do FRA} = \frac{(\text{taxa de juro do FRA} - \text{taxa de juro de liquidação}) \times VN \times \frac{n.º \text{ dias}}{\text{base anual}}}{(1 + \frac{\text{taxa de juro de liquidação} \times n.º \text{ dias}}{\text{base anual}})}$

Where:

• taxa de juro do FRA: FRA contract interest rate.
• taxa de juro de liquidação: interest rate in effect in the market on the date of calculating the FRA settlement amount, which corresponds to the interest rate practiced by the financial counterparty.
• VN: notional value of the FRA contract.

Banco de Moçambique Administração

• n.º de dias: FRA period.
• base anual: number of days in the year, according to the convention used.

D. Final Provisions

21. Any doubts arising from the interpretation and application of this Circular shall be clarified by the Markets and Reserve Management Department of the Bank of Mozambique.

22. This Circular enters into force on April 16, 2021.

BANK OF MOZAMBIQUE Monetary Stability Department [Signature] Silvina de Abreu Administrator