Position 3 : Troubadour holds a short position in a yen/US dollar forward contract with a notional value of $1,000,000. At contract initiation, the forward rate was ¥112.10 per $1. The forward contract expires in three months. The current spot exchange rate is ¥112.00 per $1, and the annually compounded risk-free rates are –0.20% for the yen and 0.30% for the US dollar. The current quoted price of the forward contract is equal to the no-arbitrage price.
Question : The value of Position 3 is closest to:
Correct Answer: ¥239,963.
The current no-arbitrage price of the forward contract is ¥111.8602
If the dude is short yen/usd, he is short YEN. (CFAI curriculum states that in currency forwards/futures use the convention is DC/FC).
How is it possible that the position has positive value? If he has agreed to sell 112.10JPY to get 1 USD while the current price of the contract is 111.8602JPY for 1 USD, doesn’t his position have a negative value?