I just cannot figure out the difference between these two formula…
forward contract: inflow/(1+Rf domestic) - outflow/(1+Rf foreign)
currency: spot rate/(1+Rf foreign) - future rate/(1+Rf domestic)
whats the base currency? What currency is being long?
anyone can help?
I never saw the first one before.
The second values the forward rate, the domestic currency is the base currency, or the currency you’re long in the forward, but short in the underlying (if it’s a hedge).
we should use the foreign currecny as the base currency in the calculation, right?
No, why would you.
Take a look at your L2 books, they have the forward contract valuation.
I have not seen the first either.
But the foreign should be the base in this case. Can a third person please clarify?
Yes, for value to long the base currency, if foreign currency is base, then:
V= S/(1+RF(f)) - F/(1+RF(d))
Ok… ill practice this stuff since after all you have asked I noticed I am not a master in this area. thank you guys.