Forward Mark Calculated with airSlate SignNow

Stick formula contract

welcome to another my tutorial today it will be on forward contract valuation and F air a contract valuation the motivation behind this video is that usually most of the textbooks show you quite a complicated way how to well how to value forwards contract but my in my video I'll show you a simplified way much more easier and logical way how you can do that so firstly let me illustrate how it is mostly explained in text books so let me start to win with an example let me copy this example in this example right here so that we have it here okay and the task is as follows we have some forwards contract you are versus USD and it has been already entered into the contract trial price which is also called strike is 11.3 dollars per euro and we are going to sell 1 million euros the current current a fix rate is one point thirty five dollars per euro the question is what is the value of the contract if it matures in nine months from now and the current interest rates are as follows well what what you usually get from your textbooks is the following let me copy this in here and what this formula say is basically following we have a currency pair we determine the current forward forward price that would apply to this currency pair taking into account risk-free rates on the on that currencies and also the maturity and then we compare the the current forward price with the with the strike this is the strike of our contract and we discount it back back to now okay so this is the basic idea on forward contract evaluation so we have currency pair EU are USD okay the current spot price denoted s s is 1.35 and that means USD per euro okay then we have some contractual price which is one point three dollars per euro and the amount is minus 1 million euros because we are selling yours okay the maturity of the contract is nine months so in years it's 0.75 and interest rates on euro is 0.02 interest rate on dollar is 0.005 okay per annum and now we are going to stick with this formula here so if we have currency per like this we just follow the steps we firstly calculate the forward price the current forward price that would be applied if we wanted to set up the same contract right now so the current forward price would be the spot price times exponential so our two in our case is USD interest rate minus euro interest rate times the maturity in years intuitively if USD if there is a lower interest rate on USD the USD must appreciate on forward that means that this number has to be lower that the forward price will be lower than the spot price okay and that's exactly what we are getting here so...