What is the mark-to-market value of the contract closest to after 30 days?
A) USD 860
B) USD 1,195
C) USD 2,190
Answer: A
The original 60-day forward contract calls for long GBP. So the all-in forward price FP = 2.0085. After 30 days, the contract would still have 30 days remaining to expiration. The new 30-day all-in forward price to sell GBP is 2.0086 +(7.6/10,000) = 2.00936. The relevant 30-day USD interest rate is 4%.
_ My Input: Shouldn’t the new 30-day all-in FP be 2.0089+.0008 = 2.0097 instead of 2.00936, since we are buying GBP and the dealer sells at the ASK price? It doesn’t make sense to me to be using the BID price here, since we’re not the dealer… or am I incorrect in my thinking? Schweser is a POS sometimes…Thanks!_
no, you’re wrong. You have to use the bid side because you long GBP before, so now to mark to market, you have to short GBP (take the opposite side of the trade). So the relevant rate is the bid, as shown in the answer.
when MTM, always take the oppoosite side of the original trade
BTW how did you insert that image into your post ??
Why does the formula for the value of the currency forward differ in the econ and derivatives section? In the derivatives section, the value is based off the spot price, and interest rates from both countries affect the value.
They differ b/c the one in the Econ section is for valuing the currency forward as part of M2M. The formula in the derivatives section does not account for M2M, and is just valuing the forward at or prior to maturity.
During mark to market your position is settled on last market price. At futures contract this means that if you reach losses you may expect a margin call from pleasent voice lady.
Forward contracts are marked to market just to determine further action directions in my honest opinion.
