So before expiration, is the value to the long position just Spot / 1+Rf foreign ^ n minus Forward / 1 + Rf Domestic ^ n If this value is positive then the long faces credit risk? At expiration, is the formula just Spot - Forward, and if it is positive then long faces risk? This subject is going to be the death of me in 2 days
It looks right to me for longing a foreign currency. Remember to state all Fx rate in indirect method.
James, what do you mean by indirect method?
The indirect method is: FX rate = Domestic currency / Foreign currency Direct method has the Foreign Cur. as the nominator and Domestic Cur. as the denominator. Either in 07 or 08 AM exam, there was a Q providing the direct method FX rates in order to trick the candidates. In that case, u would need to convert them back to indirect method to do the calc.
Ahh I see it now… yup it was in 2008 question 7C they gave it to you in Yen/ZAR when the company is a south african company… no wonder why the answer was not making sense… thanks a lot for the clarification.