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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.

.....woof

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I think the confusion is why they have put ‘RR’ in brackets for the counter party. I presume we are RR? (The company in the case study)

CFA 2008 Q7C

.....woof

Ignore guys, makes sense.

RR shorted yen and ZAR strengthened (Yen depreciated) as RR is short that position have made a gain there and therefore faces the credit risk. 

.....woof

rexthedog wrote:
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

It’s not 17.5 / 1.10; that would be the value if T = 1.  It’s 17.5 / 1.100 = 17.5 / 1 = 17.5.

It’s not 15 / 1.01; that would be the value if T = 1.  It’s 15 / 1.010 = 15 / 1 = 15.

We agreed to sell JPY at JPY/ZAR 15, or ZAR/JPY 0.0667.  The spot price is JPY/ZAR 17.5, or ZAR/JPY 0.0571.

We’re all set to make a bunch of money, but only if the counterparty delivers the ZAR; we bear the credit risk.

Simplify the complicated side; don't complify the simplicated side.

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