Will we have to know the equations to calculate FRA value?
It appears to me that the only things we need for credit risk is futures/forwards and options.
Future/Forward Strategy:
- Take the spot rate and subtract the PV of the contracted rate.
- If you are long, and the spot rate is greater than the PV of the contracted rate, then your position is positive and you have the credit risk
- If you are short, and the spot rate is less than the PV of the contracted rate, then your position is negative, and the counterparty has the credit risk
Can someone confirm the credit risk in both cases is potential credit risk??
Option Strategy:
- Calculate the current value of the option position
- The buyer of the option always has the credit risk. For American options, there is current and potential credit risk; for European options, there is only potential credit risk (the value of the option position)
