Valuing Currency forward. Whats bugging me..

CFA Level II Derivatives
#1

So one thing i haven’t been able to grasp is why do we discount spot rates in valuing currency forward?

Its the rate now… why do we discount the current rate?

I looked at magicien’s site but this is still not clear.

would be good if someone can answer.

Thanks

#2

Just remember the Forward from Int rate parity, where you use FC/DC quote & use Rf rate of FC in numerator & rf rate of Dc in denominator

#3

You’re discounting the spot rate because you’re applying it to the present value of the currency you’re being delivered, not to the contract value.

If you contracted to receive JPY1,000,000,000 in three months, and you’re valuing it today, you’re valuing it on less than JPY1,000,000,000: the present value of JPY1,000,000,000. The discounting of the spot rate isn’t discounting the value of the spot rate, it’s discounting the amount of JPY to which it is being applied.