Currency Forward

CFA Level III Portfolio Management
#1

I understand that the value of a 1 year forward contract to buy a stock at a strike of $50 will be as follows 3 months into the contract:

current market price of stock minus $50/(1+rfr)0.75 …correct?

Now if we change this to a currency forward- to buy USD forward in 1 yr at a strike of $1.2/EUR…to value this contract 3 months in:

  1. take opposite position- so calculate new forward rate, which is now a 9 month forward rate (I do know how this is done)

  2. value of contract is the difference between these two forward contract rates, but then discounted back 9 months?

My Qs are- am I correct in all of the above & also- are these 2 methods consistent or am I missing something? I keep forgetting how to value a forward contract when currencies are involved, want to make sure I have done the above correctly…

Thx!

#2

What you’ve written is consistent. For the stock, today’s spot price is the present value of today’s price for a forward contract on that stock. So you take the difference between that forward price and $50 and discount that back to today; you get the difference between today’s spot price and the present value of $50.

#3

gotchya ty!

#4

My pleasure.