I would like to know when completing the arbitrage strategy, why on earth do we discount the current spot fx price? #12 chapter 58, The book says the So= 1.0231, yet when we do the arb strategy we discount this amt by the value of the the rf rate. Yet to find the FP we do So(1+rf), so then why would you then discount this So price again.
when you arb, you need to find the mispricing. you can calc the price difference in any timeline you like. you can calc on the forward execution date OR the present. either way is correct. maybe the statement on the book is a little abundant, but it just says a theory for pricing/arb: 1. you discount all prices to the present(or any timeline) and calc the difference. [you may still need to discount the difference to some date for the “arb profit at that time”] 2. to calc FP is simply a way for correctly pricing the instrument…
thanks