currency fwds domestic, currency, discount, determine

badonkus

Referring to questions 11 and 12. part c from reading 60, fwd markets and contracts:

11 c. It is now 30 days since the US company entered into the fwd, spot is $.55, interest rates are same as before, calculate value of US company's fwd position.

I have no problem getting the no arb rate, but getting mixed up as to what rate, foreign/domestic, should be used to present value new spot rate and initial value of fwd.

How do we determine what rate should be used to discount spot and what rate for the fwd?

Thanks,

John

MiniMe7

Use the currency on bottom...the thing you are buying or selling.

tobeornottobe

to discount the spot rate, correct?

kickthatcfa

It depends on how you do it. If you use their formula, just apply it as is (the value formula). I don't use that...I have enough formulas to remember. What I do is calculate the price of the new contract after 30 days passed. Then the value of the contract is simply the difference between the original price (at initiation) minus the new price (the one you calculated after 30 days). That amount needs to be discounted to today (day 30) using the rate of the subject currency.