Hello, Can somone please explain the calculation #1 on p49 of V5? Why do they discount the spot rate? The text example (p47, using an asset) just subtracts PV of the fwd from the Spot. Why is the example different? Thanks PS I searched for this question on the forum, but could not find it, so sorry if it is a repost.
it is correct, but they did not include some steps: new fwd = { 0.862 * [(1+6%)^1.5] / [(1+5%)^1.5] } original fwd = 0.90 to get the value of the fwd at maturity, you do: new fwd - original fwd = = { 0.862 * [(1+6%)^1.5] / [(1+5%)^1.5] } - 0.90 value today is present value of that, today, which you get dividing by (1+6%)^1.5 as you can see, in the first part of the equation, you would be multipliying 0.862 by (1+6%)^1.5 in the numerator and dividing by (1+6%)^1.5 in the denominator… so they offset each other (in spanish we say “simplificar”, I don´t know the word in english) so you end up with: = { 0.862 / [(1+5%)^1.5] } - { 0.90 / [(1+6%)^1.5] }
currency forwards are different, if you buy now at spot, you can still invest what you bought.
currency forward are priced the same as regular forwards. It is discount that is tricky. I think you will discount by the currency that you are holding. If you are long yen (paying with dollars) you discount by dollars rate, if you are short yen (selling yen for dollars) you will discount by by yen rate
comp_sci_kid Wrote: ------------------------------------------------------- > currency forward are priced the same as regular > forwards. It is discount that is tricky. I think > you will discount by the currency that you are > holding. If you are long yen (paying with dollars) > you discount by dollars rate, if you are short yen > (selling yen for dollars) you will discount by by > yen rate correct i prefer to look at them as equity forwards, for simplicity. I buy a stock called “currency whatever” with a dividend yield equal to that country interest rate. So I use my local rate to get presenta value. It makes everything simpler.
hala_madrid Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > currency forward are priced the same as regular > > forwards. It is discount that is tricky. I > think > > you will discount by the currency that you are > > holding. If you are long yen (paying with > dollars) > > you discount by dollars rate, if you are short > yen > > (selling yen for dollars) you will discount by > by > > yen rate > > > correct > > i prefer to look at them as equity forwards, for > simplicity. I buy a stock called “currency > whatever” with a dividend yield equal to that > country interest rate. So I use my local rate to > get presenta value. It makes everything simpler. same, i just need to remember to discount by the rate of the currency you actually holding