Page 7 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 11.d: Calculate the mark-to-market value READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
of a forward contract.
MODULE 11.2: MARK-TO-MARKET VALUE, AND PARITY CONDITIONS

If the forward contract price is consistent with covered interest rate parity, the value at initiation is zero to both parties. After
initiation (or during its term or duration), the value of the forward contract will change (to mark-to-market value) as forward quotes
for the currency pair change in the market.

EXAMPLE: Valuing a forward contract prior to maturity: Yew Mun Yip has entered into a 90-day forward contract long CAD 1 million against AUD at a
forward rate of 1.05358 AUD/CAD. Thirty days after initiation, the following AUD/CAD quotes are available:

Long CAD means Yip’s contract calls for Buying CAD (selling AUD).

To value contract, we must unwind (sell) the position (Yip must take an
offsetting position in a new forward contract with the same maturity).
FPt Now (T – t) = 60 left = 1.0612 + 8.6/10,000 = 1.06206.

Meaning? How/Why?

Thirty days into the forward contract, Yip’s position has gained
(positive value) AUD 8,463.64. This is because Yip’s position is
long CAD, which has appreciated relative to AUD since inception
of the contract. Yip can close out the contract on that day and
receive AUD 8,463.64.