If i use a forward currency contract to buy foreign currency (exchanging my domestic currency), why would the annualized return denominated in that foreign currency be the risk free rate in that foreign currency for the relevant period??
i would have thought that it should be the risk free rate earned on the domestic currency because essentially you would be keeping that domestic currency until the forward contract maturity earning the domestic risk free rate and then converting to the foreign currency at that time, both the interest and principal at a pre-agreed forward rate.