Currency Forward Contracts Vt = St/(1 + R fc)^T-t - Ft/(1 + R dc)^T-t Can some one expain me why do we use foriegn dsicount rate to discount Spot rate and domestic dsicount rate to discount Future rate ?
borrowing vs. lending. DC=, FC=Euro Use buy Euro at Spot lend it forward at Euro rate --> So got lent at the Euro rate. Convert at the forward rate back to . Compare that against what the would be lent at the rate. So the Euro is being lent at the $ rate.
Thanks CP.