In risk management section, there is an example about how to calculate the value of the credit risk when the foward is three months into the contract. My question is why CF inflow is discounted by domestic interest rate, while CF outflow is discounted by foreign interest rate. Thanks.
Inflow is what you would receive => PV discounted at your domestic risk free Outflow is what your foreign counterparty would receive => PV discounted at foreign counterparty’s risk free
Thanks. I guess the calculation is comparing the cash flows received by both parties, so they are discounted by respective party’s own discount rate. Thanks.