Differences in present value formulas - DCF vs. Currency Forwards

CFA Level II
#1

Guys, question:

I’ve noticed that there are some present value formulas that show up differently. For instance, when we discount cash flows using DCF we us the factor 1/(1+r)^n while in the present value formula used for the currency forward value before expiration we use:

1 / (1 + R(days/360)) in the denominator

Is there a reason for this difference?

Thanks.

#2

Because I belive currency forwards are usually less then a year so you have to get fraction of annual interest rate for that period … while other DCF flows you are discounting years of cash flows.

#3

The difference is that one is using effective interest rates while the other is using nominal interest rates. I wrote an article on this; maybe it’ll be of some help: http://financialexamhelp123.com/nominal-vs-effective-interest-rates/.