Forum Archive Index - June 2002

["trader 100" <trader_100@hotmail.com>]

Hi Snoopy

Your explanations are spot on although the basic formula I have for 
calculating forward rates (which ignores the different days in a year 
conventions of the US and NZ) is:

F = S - [(1+(USi*N/365))/(1+(NZi*N/365))]*S

Using the numbers we have been discussing this becomes:

F = 0.47 - [(1+0.0175)/(1+0.055)]*.47
F= 0.4533

I don't entirely understand your question.  By entering into a forward 
contract a NZ company has technically removed all of FX risk (assuming you 
accept the standard finance defintion of risk as "the variability of 
outcomes".)  The NZ company knows for certain that they will receive the 
forward rate so all of their risk is removed.  The fact that the forward 
rate may be better or worse than the spot rate in one years time doesn't 
have any impact on the risk.  Putting it another way, the act of insuring 
your house removes the risk of financial loss from a natural disaster 
regardless of whether disaster strikes or not.  You may not make a single a 
claim over say a 10 year period causing you, with the benefit of hindsight, 
to conclude that the insurance wasn't worth it but without it in place you 
would be opening yourself up to risk.

Regards,

T100.



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