Value of forward currency contract prior to expiration

CFA Level II Economics
#1

Hi friends,

I have a doubt pertaining to the formula given in for valuing a currency forward prior to expiration.

The discounting to current day is done by dividing the numerator [1 + R(days/360)]. This is essentially discounting at simple interest. Why is the discount factor not [1 + R]^days/360 which would be discounting at a compound rate (which is used in forwards material of the curriculum btw)

Thanks!

#2

The formula in Economics uses nominal rates (your first formula) while the formula in Derivatives uses effective rates (your second).

That’s the way things go.

#3

I know this is a very late reply, but thanks a lot ! :slight_smile:

#4

You’re quite welcome.

I hope that it was helpful.