|Author||Topic: Currency forward question|
I'm writing my level 2 exam in June 2013 and I have a question about currency forwards.
Valuing currency forwards are explained in the economics section and in the derivatives section. But, they use different formulas.
In the economics section (on page 494) a currency forward = spot price x [1 + foreign interest rate * (time/360)]/[1 + domestic interest rate * (time/360)]
In the derivatives section (on page 39) a currency forward = [spot price / (1 + foreign interest rate)^T]x(1 + domestic interest rate)^T
Hope those are written in a way that makes sense...
The only difference I can see is that the economics section uses LIBOR and 360 days, whereas the derivatives section uses 365 days and doesn't use LIBOR. Why is there a difference here? Is this the reason why these formulas are different, or am I overlooking something else?