Lessons

- CFA Level 2: Derivatives Part 1 – Introduction
- What are Forward Contracts?
- Equity Forward Contracts
- Fixed Income Forward Contracts
- Currency Forward Contracts
- Forward Rate Agreements (FRA)
- Credit Risk and Forward Contracts
- Introduction to Futures Contracts
- Futures: Convergence of Spot and Futures Prices at Expiration
- Futures Prices vs. Forward Prices
- Contago and Backwardation
- Pricing Stock Index Futures
- Pricing Interest Rate/Treasury Bond Futures
- Pricing Currency Futures
- Eurodollar Futures

# Currency Forward Contracts

- A currency forward contract involves two currencies and two interest rates. A currency forward contract lets you lock-in a pre-defined price at which you can buy/sell a currency on a future date.
- Contract parties commonly enter into currency forwards with the objective of hedging exchange rate risk exposure.
- The interest rates can be interpreted as a net cash flow yield of investing one currency in a risk free asset and borrowing the other currency.

### Price of a Currency Forward with Simple Compounding:

F(0,T)_{X/Y} = S_{0,X/Y} × ((1+r_{X})/(1+r_{Y}))^{T}

Where:

- S0 = Spot exchange rate for X/Y (#X units domestic per 1Y foreign) at initiation
- rX = Risk free rate in country X (domestic currency)
- rY = Risk free rate in country Y (foreign currency)

### Price of a Currency Forward with Continuous Compounding

F(0,T)_{X/Y} = (S_{0,X/Y} e^{-r}y^{T} ) e^{r}x^{T}

### Value of a Currency Forward with Simple Compounding

V_{t}(0,T)_{X/Y} = (S_{t,X/Y} / (1+r_{Y})^{(T-t)}) - (F(0,T)_{X/Y} / (1+r_{X})^{(T-t)})

### Value of a Currency Forward with Continuous Compounding

V_{t}(0,T)_{X/Y} = (S_{t,X/Y} e^{-r}y^{(T-t)}) - (F(0,T)_{X/Y} e^{-r}x^{(T-t)})

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