# ECON CFAI Pg. 492 #4 (blue box) -- Forward Rate/Currency Exchange

I’m having trouble here with the logic. I obviously need to brush up on my derivatives/forward rate currency contracts…

In this problem, to find the answer they took the difference in USD cash flow in 3 months, ie. comparing old forward rate she was in, to new spot + forward points, and then discounted that cash flow back to now, using the 3 month USD Libor rate.

I understand this, BUT, is there not a different way to calculate this? Like instead of finding the difference in cash flows in future and discounting back, is there not a way to find that future USD cash flow (ie. 7 900 000 USD) and bring it to PV, and simply compare the spot now, without using the forward points?? I’m not sure if i’m making sense here or articulating it properly… I’m asking b/c I tried it this other way above, and I thought it would yield same answer, but it’s not.

can anyone chime in??

basically, in that econ question…they found the value of the forward rate by looking at the difference in cash flows in the future, and then finding the answer, discounted back to present at the US interest rate. fine…

BUT, in derivatives, you can usually find that forward rate (0.79 here) and discount it back to present, to compare with the current rate given. i just can’t figure out how to do that on this question. i want to figure out b/c it seems silly to use 2 different methods to compute currency FRA when doing derivatives vs. econ.

…after further thought/analysis, i think i’m figuring out why this method won’t work with this question.

i believe it’s because the interest rates have obviously changed since the inception of the forward rate (or at least one of them has?), and these changes are implicit in the forward points given in the question. that’s why you must calculate things going forward, instead of discounting back to the present.

but i’m not really sure…oh well.