Can someone help me understand this. The old 2008 exam says that Red River has the credit risk. I thought the formula for finding the credit risk of a forward was as follows: Spot - Forward/(1+r)t, meaning that if the output is positive, the long has the credit risk cause they are owed this amount. In the problem, I am calculating the credit risk as 17.50 (current spot) - 15.00 (forward) = which should give you a positive number, right??? So shouldn’t the credit risk be to the Counterparty since Red River is short the contract? Thanks.
short Yen, long ZAR, FX rate expressed in number of yens per 1 unit of ZAR
? Can you walk me through the calc by chance? Thanks.
I always figure out who is “winning” then solve for the difference.
RR is long ZAR forward at 15.00 JPY/ZAR compared to spot rate 17.50 JPY/ZAR, it is profitable position for RR…
so how to calculate the profit for RR? if r=0.05 T=1 year. is it 17.5-15/(1+0.05) JPY? or 17.5-15/(1+0.05) ZAR?
Depends on how it was quoted. In this case, it’s a JPY/ZAR convention so the profit is calculated in terms of JPY (direct quote from Japanese perspective).