Arbitrage free forward price 144What does the FX-forward rate depend upon?
No arbitrage condition: INTEREST RATE PARITYHCt
HCTFCT
FCt(1+r*t,T)(1+rt,T)1/(1+r*t,T)1/(1+rt,T)1/St
1/FtT
St FtT()()()T
r
r
tTtT
r
r
tTtrTTtT
rtT
r
r
tTttT
rTtrTe S F e S F e F e S
e S F S e F e
*****,,,,,1
1
1
*1
−−−−−=
⇒
⎫ ⎪ ⎬ ⎪ ⎭≥
⇒
≥
≤
⇒
≥
Derivative securities: Forwards - Pricing