currency forward contract

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Joined: Thu May 03, 2012 9:56 pm

currency forward contract

Postby blackjack21 » Thu May 03, 2012 10:02 pm

current spot CHF/USD rate: 1.3680
A currency trader notices 3 mnth fwd prce is CHF/USD : 1.3605

3 mnth USD Interest rate: 1.05%
-do- swiss I.R. : 0.35%

What shd the trader do to make an arbitrage trade?

Since USD IR> Swiss IR => inflation is grtr in US, hence USD shd go down in future hence CHF/USD contract shd appreciate in value and hence I(subscript)1=1.05% however in the answers 0.35% has been taken in that they have calculated F= 1.3680 exp(0.35-1.05)*(3/12)*0.01

Why I1= 0.35% and I2= 1.05%?

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Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: currency forward contract

Postby suresh.wadhwani2009 » Fri May 04, 2012 12:56 pm

Dear Blackjack,

Forward(DC/FC)=Spot(DC/FC)*exp(rate in DC-rate in FC)*T
Forward(FC/DC)=Spot(FC/DC)*exp(rate in FC-rate in DC)*T

where FC= Foreign currency and DC=Domestic currency


If you are taking I1=1.05% and I2=0.35%
then don't take spot rate as CHF/USD=1.3680, invesrse this relationship USD/CHF= 0.730, this will be your spot rate.

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