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[ T F ] A currency Forward is essentially two (2) zero-coupon bonds each one denoted...

[ T F ] A currency Forward is essentially two (2) zero-coupon bonds each one denoted in local currency and a local interest rate.

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Answer #1

False.

Currency forward are hedging contracts wherein the buyer and seller comes in agreementa and locks the currency rates for purchase or sale of the underlying currency. Interest rates do not have a role to play in currency forward contracts.

For example : Person A is sitting in US and has sold some stuff to a person B who is sitting in India.B will be paying in INR and suppose after 3 months. Now A will face exchange rate risk. So what A can do is that it can enter into currency forward contract wherein the INR/USD rates will get locked and A's currency risk is hedged.

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