Hello. The below text is provided on a short Forward contract which expires today. The explanation states that short bears credit risk here because the spot is at 17.5 verses the 15 forward rate. I was hoping someone could explain given I would think at 17.5-15=2.5 the value to long would be 2.5 and therefore the long would bear the credit risk and not RR the short. Any help is appreciated.
Forward:
• short a two-year forward currency contract on Japanese yen (JPY) denominated in
ZAR at 15.00 JPY/ZAR forward rate;
• this forward contract expires today;
• exchange rate was 14.50 JPY/ZAR when RR entered the contract;
• the spot (current) rate is now 17.50 JPY/ZAR;
• compound annual interest rates for the two-year period: 1 percent in JPY and 10
percent in ZAR.
Explanation:
Based on the comparison between the forward rate 15.00
JPY/ZAR and the spot rate 17.50 JPY/ZAR, the short-yen
counterparty (RR) receives the payment, so RR bears the
credit risk.