Who faces this credit risk?
We are company ‘RR’ and go short a two year forward contract on JPY denominated in ZAR at 15 JPY/ZAR
The forward contract expires today.
Spot rate is currently 17.5 JPY/ZAR
JPY r = 1%
ZAR r = 10%
I would apply the formula for value to long = S/(1+R)T - F/(1+R)T
17.5/1.10 (No T because it is today) - 15/1.01 = 1.0576
Now, because this is a positive value is this not a gain to the long? Therefore as we are SHORT this a loss to us. So we owe the counter party money, and therefore the COUNTER PARTY faces credit risk?
The answer just says:
Based on the comparison between the forward rate 15.00 JPY/ZAR and the spot rate 17.50 JPY/ZAR, the short-yen
counterparty (RR) receives the payment, so RR bears the credit risk.