Page 32 - FINAL CFA II SLIDES JUNE 2019 DAY 10

LOS 39.a: Describe and compare how equity, interest
rate, fixed-income, and currency forward and futures READING 39: PRICING AND VALUATION OF FORWARD COMMITMENTS
contracts are priced and valued.
LOS 39.b: Calculate and interpret the no-arbitrage
value of equity, interest rate, fixed-income, and MODULE 39.6: PRICING AND VALUATION OF CURRENCY CONTRACTS
currency forward and futures contracts.

Pricing Currency Forward Contracts (application of covered interest parity)
where:
F and S are quoted in price currency per unit of base currency
R PC = price currency interest rate
R =base currency interest rate
BC
Use a 365-day basis to calculate T if the maturity is given in days.
EXAMPLE: The risk-free rates are 6% in the United
States and 8% in Mexico. The current spot exchange rate
is $0.0845 per Mexican peso (MXN). Calculate the
forward exchange rate for a 180-day forward contract.

Valuing Currency Forward Contracts After Initiation
: Where:
V = value (in price currency units) to the party long the base currency
t
FP = forward price at inception of the contract maturing at time T (in PC/BC)
FP = forward price at time t (t < T) of contract maturing at T
t
r PC = interest rate of the price currency

EXAMPLE: David Hastings entered into a four-month forward contract to buy €10 million at a price of $1.112 per euro. One
month later, the three-month forward price is $1.109 per euro. The USD interest rate is 0.30% and the euro interest rate is
0.40%. Calculate the value of Hastings’s forward position.

The value of the forward position is negative to Hastings, as the
forward price of euros has dropped since the contract initiation.