# Serious Error in 2009 Essay Q9 Answer

Q9 Part B. A Canadian company Maple Leaf is long a forward contract on EUR 50 million at 1.63CAD/EUR, expiring in 6 months. The spot is 1.64 CAD/EUR and interest rate for CAD is 3% , for EUR is 4.5% Who bears what credit risk. Solution says the short side bears the credit risk because The logic is forward value = (1.64/1.045^0.5)-(1.63/1.03^0.5)<0 I think it is the opposite. Long side bears the credit risk because forward value=-(1.64/1.045^0.5)+(1.63/1.03^0.5)>0. for example if spot is high, maple could have get more canadian \$ from spot rather than forward. So the forward value is negative. This is also consistent with schweser using inflow-outflow. Inflow is based in forward contract for maple, and outflow is based on market value. and inflow>outflow so maple forward is in the money. Maple is bearing the credit risk!

Think you get the logic mixed up a bit. To show a simple an example. You (Maple) just entered a contract based on spot 1.63CAD/EU, 10 seconds later spot jumps 1.64CAD/EU. Does your contract value have positive value? Yes, since you can buy EU with fewer CAD than current (market) spot rate. Therefore the logic is the expression with current spot value MINUS the expression with forward rate, not forward rate MINUS current spot rate as you did. Crack open level II book to check.