Mock 2008 - Q7 Credit Risk - currency forward (RR)

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Guys,
sorry in advance. I have gone through the answer on the above question and I do reckon that It does make perfect sense.
My issue here is that I always tend to build up some solid rationale to draw answers, in this case through a formula.
Specifically on the above question I simply assumed the following :
1. To estimate the current (potential) credit risk on currency forward I use the following formula :
[S/ (1+Rfc) ] - [ F/ (a+Rdc]; and
2. Given the above should show the LONG perspective;
3. If LONG perspective is POSITIVE hence LONG should BEAR credit risk.
Specifically on the above exercise I did
17.5 / (1,01)^2 - 15/ (1,10)^2 = 4.75 POSITIVE! BUT : well given RR shorted the forward it doesn’t bear the credit Risk, counterparty does….
what’s wrong with my application of the formula and how I can reconcile with the right answer?
thanks for your help,
 
S and F are quoted as DC/FC = JPY/ZAR
===========================
so rdc = r JPY=1%, rfc = R ZAR=10%
and S/(1+rfc)^t - F / (1+rdc)^t gives you
17.5/1.1^2 - 15 / (1.01)^2 = -0.2416
 
thanks CPK but the exercise refers to a company that is based in South Africa, I then assume ZAR as the BASE (DC) currency?
 
the formula is not dependent on the country – it is based on fhe formatting.
when they say S and F are DC/FC and S/(1+rfc) it is to be taken in that way. So JPY / ZAR -> DC = JPY, FC=ZAR
Not that country is South Africa - and therefore DC = ZAR.
(And remember the CFAI convention for currency formatting in the Currency Management Chapter which is a later introduction (2014 circa) is different from that in the Risk Management chapter - which is of older vintage.
 
Thanks CPK. I am afraid It’s still not clear, Apart from the CFAI assumptions or ways to proceed, in the above exercise we talk about a South African company so the base currency would be supposed to be the domestic one….?
As far as I understand I study on recent books (from 2014 on).
Definitive feeling : I don’t really know how to get FX correct every time there’s always a peculiarity around FX mgt that’s get things confusing.
thanks indeed for your help anyway.
 
for that credit risk formula - always take DC/FC as the way the currency is expressed.
and take DC to be the top currency on the expression. So JPY/ZAR - JPY=DC, ZAR=FC
always
check it out …
USD/CHF - USD=DC, CHF=FC
 
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