Microsoft PowerPoint - PoF.ppt

Arbitrage free forward priceƒ 143

Underlying = exchange rate

ƒ

... no arbitrage condition

ƒ

Spot price/rate,

S

t

direct / right quote: #HC / 1FC

• ... price of one unit of FC in units of HC• ... buying or selling always refers to the currency in the

denominator

• EUR / ice-cream = 2

Ä

price of 1 ice-cream is 2 EUR

• indirect / inverse quote: FC / HC

()

T r r t T t

e

S

F

*

0

, 0

−

=

Derivative securities: Forwards - Pricing