Who holds the credit risk at the maturity of a forward currency contract if the spot is greater than the forward rate? and why is it the long or short, and it because the long or short is less than 0 from the equation (f-s)/s*360/n which tells payment to the long, it would look like the short is due payment and thus the short is exposed to credit risk because long is less than zero Schweser claims the exact opposite. Help!
I think you might be confused on who owes what. If the forward price is less than the spot, the long is able to borrow money at a lower rate than current price. This saves the long money. The catch is that the short may not honor the deal since they are guaranteed to lose out (time is at maturity), hence the credit risk for the long.
I don’t quite understand “which tells payment to the long, it would look like the short is due payment”. The long wants the spot to rise. If spot is greater than forward, they win, which means they have money owed to them and they have credit risk. Since the short owes money, they don’t have any credit risk. I could have it backwards though. It screwed me up when Schweser started using FC/DC out of the blue.
thanks for the help, i got it…