@sophie just a quick one as i’m a little confused here (don’t think it’s mentioned clearly anywhere in schweser)
when you are buying a 1-year forward rate of $1.5/gbp, are you:
1. securing the rate of $1.5/gbp in 1 year’s time to sell gbp or buy gbp.
2. securing the rate of $1.5/gbp in 1 year’s time to buy gbp with USD in hand.
@diya well for FRA there’s only 1 rate for the contract. For example, if you long FRA @ 8% so at maturity if the rate gets above 8% you’ll gain.
However, for FX there’s USD & GBP (for USD/GBP) so it could be that either unless we are always referring to the base currency, long $1.50/gbp would means to buy GBP and sell USD at maturity.
So i’m not too sure about this.
The Trick: always treat what is in the denominator as a commodity.. So look at “$1.5/gbp” as “$1.5 per potato” (potato being the commodity)..
Answer 1: If you take a long position on a 1yr contract.. you will BUY one gbp or one potato at $1.5 each (you buy the item in the denominator of the quote)…. Similarly, if you take a short position, you will sell one gbp or one potato at $1.5 each.
Answer 2: Yes, “you are securing the rate of $1.5/gbp in 1 year’s time to buy gbp with USD in hand.”
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