CFAI V5 P282 Q21 If a position is a long forward currency contract to buy pounds at Euro1.45, the current exchange rate is euro1.4 per pound. The county party is LOndon Securities House. Who bear the credit risk? The investor or LSH? I know its the long future position is detrimental to the investor since he gets less pound. He may choose to default, so LSH bear the credit risk. But can someone explain to me by using forward premium? Thanks.
use search function- discussed before at length.
LSH currently bears the credit risk as they will be getting 1.45 as compare to current spot rate of 1.4. PV of inflows - pv of outflows
Ft = St - F0/[(1+r)^(T-t)], if the value is negative for the long (which it looks like it is), then LSH bears the credit risk, as Pup aptly suggested.