Ccy put option payoff

CFA Level III Derivatives
#1

Folks, in the 2009 morning paper, there is a Q (# 9) on the credit risk for a JPY / CAD put option. To summarize my confusion there: while we need to find the potential credit risk for the option expiring in 6 months (long put), should we use the strike rate and the current spot rate, or should we use the strike and forward rate 6 months down the line?

Also, if the diff between the forward (or the spot, based on what we use) and the strike is positive, the long faces no credit risk, right?

Am tending to think we should use the forward rate, but the recommended solution uses the spot.

Appreciate if someone can comment here. Thanks!

#2

for options, always use strike and spot

for forwads, always use forward (contract) price and spot

Strike rate of options and forward contract rate is conceptually equivalent

#3

so…basically calculate the value of the contract:

for Forwards/futures the value is St-Ft

for options it is max[0,St-X] or X-St

and then depending on the +/- values we interpret accordingly ?

thx

#4

Thanks guys!