Forwards

[Phoenix669]

Looking to learn about FX and interest rate forwards. Anyone familiar that could point me in the right direction?

 

[Phoenix669]

What do you need to know? - thats a bit of an open ended question.....

Looking for help on pricing/arbitrage on currency forwards.

Have been reading through Hull's Fundamentals of futures and options markets, and still not really helping.

I.E.

Currency Y interest rate = 5%
Currency X interest rate = 7%
2y Forward X/Y = 1.2200
Current X/Y Spot = 1.2000

using currency forward pricing:

F(t)=S(0)*[(1+r(x))/(1+r)]

Where F(t) is the forward price, S(0) is the current spot price at time=0, R(x) is rate of X, R is rate of y.

therefore F(t)=S(0)*[(1+r(x))/(1+r)] or an arbitrage opportunity arises:
1.2200 = 1.2000*(1.07/1.05)
1.2200 = 1.2000*1.0190
1.2200 = 1.2228

so the forward has been under priced, you buy the forward, sell the currency and when t=1 you will make (based on $1000) ~$28 on the transaction.

Now am I wrong on this?

Edit: I understand that there is usually a spread, and that the prices will never work that perfectly. What I do not understand is the forward premium/discount. Wouldn't that in itself give large arbitrage opportunities?

 

[FOFORO]

Arbitrage

It looks like yo can make an arbitrage here, but as you are supossed to have the amount of money for delivery invested in that country, at that lower interest rate than in the other one arbitrage can not be done.

does it makes sense to you?

Looking for help on pricing/arbitrage on currency forwards.

Have been reading through Hull's Fundamentals of futures and options markets, and still not really helping.

I.E.

Currency Y interest rate = 5%
Currency X interest rate = 7%
2y Forward X/Y = 1.2200
Current X/Y Spot = 1.2000

using currency forward pricing:

F(t)=S(0)*[(1+r(x))/(1+r)]

Where F(t) is the forward price, S(0) is the current spot price at time=0, R(x) is rate of X, R is rate of y.

therefore F(t)=S(0)*[(1+r(x))/(1+r)] or an arbitrage opportunity arises:
1.2200 = 1.2000*(1.07/1.05)
1.2200 = 1.2000*1.0190
1.2200 = 1.2228

so the forward has been under priced, you buy the forward, sell the currency and when t=1 you will make (based on $1000) ~$28 on the transaction.

Now am I wrong on this?

Edit: I understand that there is usually a spread, and that the prices will never work that perfectly. What I do not understand is the forward premium/discount. Wouldn't that in itself give large arbitrage opportunities?