Logic of Pricing Short-Dated Trades
Spot value date is the only delivery date where the market makes no adjustment to the rate traded to account for the carry costs of time. It is the benchmark timespan against which all other trades are priced.
CompensationForward outrights and FX swaps that settle after the spot date adjust for the interest differential. The trader holding the lower interest-bearing base (variable) currency is compensated through a higher (lower) forward rate on settlement.
The principal of adjusting for the interest differential must also apply to trades that settle before the spot date. If a trader sells the high interest-bearing currency before spot, it foregoes the higher interest it would have earned if it held the currency until spot. The trader must therefore receive compensation for the loss in interest.
How is Compensation Paid?Short-dated trades require an adjustment back in time unlike the forward outright which looks forward in time.
How are these adjustments quoted?