Currency Forward Contract Question
Forward rate = S0/(1+rf)^t * (1+r)^t
There is quite a misunderstanding over how this figure came in.
Obviously it has been derived from:
F/(1+r)^t - S0/(1+rf)^t = 0
It is understood regarding the F/(1+r)^t being discounted since it is the future rate at expiration.
It is hard to understand that if S0 is multipled by 1/(1+rf)^t (units of foreign currency) this will give the value of units in domestic currency… which is not actually the exchange rate. So how does this part come into the equation?? |