Hi I’m in trouble to understand valuing currency forward contract.
At any time prior to maturity, why is the value of currency spot rate discounted by (1+Rate of foreign currency)^(T-t)?
I think that Spot rate is just spot rate, which is not discounted by any rate.
and why is it discounted with Rate of foreign currency?
Please leave comments for me
Thank you very much!!!
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Pricing and valuing currency is based on interest rate party.
If currency A yield higher interest reate in compare to currency B.
Currency A will depreciated.
interest rate party formula = sport rate * 1+r (A)/ 1+r(b).
May this quick tip add some value
Only partially.
The exchange rate is based on interest rate parity. However, the deliverable _ amount _ is discounted from the contracted amount using the risk-free rate (for that currency); that’s the subtlety that nobody ever explains to you.