Pricing Currency Futures
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- Currency futures are priced in the same manner as currency forward contracts.
- Price of a Currency Future with Simple Compounding:
f(0,T)X/Y = S0,X/Y ((1+rX)/(1+rY))T
- T = total contract length
- 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)
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