Forwards and Credit Risk currently, currency, question, forward, credit

NakedPuts00

This was a BAD question in my opinion.
Maple is a CAD company investing in EUR. (ASSUMED)
They are really Long EUR on the business, not on the offsetting FRA.
In my opinion, they are really selling EUR and Buy CAD on the FRA. (I can be wrong)

Therefore, if I (CAD investor) invested in EUR securities and locked in a a Forward rate of .163 CAD/EUR and impliedForward (market rate) is 1.628 CAD/EUR, then I got a better deal than the market.


This was the only way that I could make any sense of this before going crazy.



Edited 1 time(s). Last edit at Wednesday, June 2, 2010 at 10:22AM by sh34.

cjs238

This is from 2009 Mock question 9.B... I still get confused on the credit risk with forwards....

Lets say you are long a currency forward, and the spot is currently higher than the forward rate... is this good or bad for you as the long?

Same thing if you were short a forward.... if the spot is higher than the forward is this good or bad?

Windjammer

in earlier post, a San Francisco, Fire Department method introduced by some one.
1st, there are always the 2 part in calculation, and sum them.
Spot/(1+Rf) and Forward/(1+Rd)

2nd, decide negative or positive sign for each of them.
if buying FC, "+" for "Spot/(1+Rf) " , because Rf is in denominator;
meanwile ,shorting DC, "-" for "Forward/(1+Rd) " , because Rd is in denominator.

If buying DC, "+" for " Forward/(1+Rd) "
meanwile ,long FC, "-" for "Spot/(1+Rf) "

in the maple case, DC is CAD, and long FC-EURO.
Spot/(1+Rf) - Forward/(1+Rd) =1.64/(1.045)^.5-1.63/(1.03)^.5


and both S and F , should be in indirect currency quote, i.e. DCX.XX / FC1.0



Edited 1 time(s). Last edit at Wednesday, June 2, 2010 at 10:37AM by annexguy.

Zestt

boston21 Wrote:
-------------------------------------------------------
> This is from 2009 Mock question 9.B... I still get
> confused on the credit risk with forwards....
>
> Lets say you are long a currency forward, and the
> spot is currently higher than the forward rate...
> is this good or bad for you as the long?
>
> Same thing if you were short a forward.... if the
> spot is higher than the forward is this good or
> bad?

You have to compare spot price and adjusted forward price (adjusted for risk-free interest rates). For example, if EUR RFR = 1% and US RFR = 0.25%, you would expect the forward price of Euro to be lower than the spot price.

mik82

annexguy Wrote:
-------------------------------------------------------
> in earlier post, a San Francisco, Fire Department
> method introduced by some one.
> 1st, there are always the 2 part in calculation,
> and sum them.
> Spot/(1+Rf) and Forward/(1+Rd)
>
> 2nd, decide negative or positive sign for each of
> them.
> if buying FC, "+" for
> "Spot/(1+Rf) " , because Rf is in denominator;
> meanwile ,shorting DC, "-" for "Forward/(1+Rd) "
> , because Rd is in denominator.
>
> If buying DC, "+" for " Forward/(1+Rd)
> "
> meanwile ,long FC, "-" for "Spot/(1+Rf) "
>
> in the maple case, DC is CAD, and long FC-EURO.
> Spot/(1+Rf) - Forward/(1+Rd)
> =1.64/(1.045)^.5-1.63/(1.03)^.5
>
>
> and both S and F , should be in indirect currency
> quote, i.e. DCX.XX / FC1.0


might be easier to just do the equation for the long and see what that value is. If positive, then the long has counterparty risk. Vice versa.

lcai

shanghai,
could you show your method?