Currency Forward Contracts

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cheapchanman

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Given:
60-day Forward rate: USD/GBP = 2.0075 - 2.0085
Investors is long GBP.
After 30 days, we have the following:
Quotes USD/GBP
Spot 2.0086-2.0089
60-day forward +7.6 / +8
Int Rates USD GBP
30-Day 4.00% 3.00%
What is the mark-to-market value of the contract closest to after 30 days?
A) USD 860
B) USD 1,195
C) USD 2,190
Answer: A
The original 60-day forward contract calls for long GBP. So the all-in forward price FP = 2.0085. After 30 days, the contract would still have 30 days remaining to expiration. The new 30-day all-in forward price to sell GBP is 2.0086 +(7.6/10,000) = 2.00936. The relevant 30-day USD interest rate is 4%.
My Input: Shouldn’t the new 30-day all-in FP be 2.0089+.0008 = 2.0097 instead of 2.00936, since we are buying GBP and the dealer sells at the ASK price? It doesn’t make sense to me to be using the BID price here, since we’re not the dealer… or am I incorrect in my thinking? Schweser is a POS sometimes…Thanks!
 
no, you’re wrong. You have to use the bid side because you long GBP before, so now to mark to market, you have to short GBP (take the opposite side of the trade). So the relevant rate is the bid, as shown in the answer.
when MTM, always take the oppoosite side of the original trade
BTW how did you insert that image into your post ??
 
Why does the formula for the value of the currency forward differ in the econ and derivatives section? In the derivatives section, the value is based off the spot price, and interest rates from both countries affect the value.
 
Got it, thanks for the help! Forgot about taking the opposite side of the original trade for M2M. And i just got skills with copy & paste. :)
 
kempayne wrote:
Why does the formula for the value of the currency forward differ in the econ and derivatives section? In the derivatives section, the value is based off the spot price, and interest rates from both countries affect the value.
Click to expand...
They differ b/c the one in the Econ section is for valuing the currency forward as part of M2M. The formula in the derivatives section does not account for M2M, and is just valuing the forward at or prior to maturity.
 
cheapchanman wrote:
Got it, thanks for the help! Forgot about taking the opposite side of the original trade for M2M. And i just got skills with copy & paste. :)
Click to expand...
LOL got it too bro
 
Can you explain more? what do you mean by M2M? why even discounting interest rate is different?
 
At t30 we are given new spot rates and 60 day forward points but don’t we require 30 day forward points to value the contract?
 
Or given the lack of current market price it is also acceptable M2P (Mark to Phantasy).
 
Flashback wrote:
Or given the lack of current market price it is also acceptable M2P (Mark to Phantasy).
Click to expand...
Flashback, can you explain why here we have to take the opposite trade? I have never seen anything like this before, mark
 
h21 wrote:
Flashback wrote:
Or given the lack of current market price it is also acceptable M2P (Mark to Phantasy).
Click to expand...
Flashback, can you explain why here we have to take the opposite trade? I have never seen anything like this before, mark
Click to expand...
Always take opposite in FX forward transactions to offset (unwind) the original position exposure.
Another rule is sell base on bid and buy base on ask, also sell price on ask and buy price on bid.
The last but not the least remember to use IR in denominator for same currency in nominator, price currency.
Forward (Futures, SWAP) market is like the driving on the wrong side of the highway.
 
Flashback wrote:
h21 wrote:
Flashback wrote:
Or given the lack of current market price it is also acceptable M2P (Mark to Phantasy).
Click to expand...
Flashback, can you explain why here we have to take the opposite trade? I have never seen anything like this before, mark
Click to expand...
Always take opposite in FX forward transactions to offset (unwind) the original position exposure.
Another rule is sell base on bid and buy base on ask, also sell price on ask and buy price on bid.
The last but not the least remember to use IR in denominator for same currency in nominator, price currency.
Forward (Futures, SWAP) market is like the driving on the wrong side of the highway.
Click to expand...
I am confused by the mark to market process, say I brought a forward to long GBP before and 30 days later, whats happening during mark to market?
 
During mark to market your position is settled on last market price. At futures contract this means that if you reach losses you may expect a margin call from pleasent voice lady.
Forward contracts are marked to market just to determine further action directions in my honest opinion.
 
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