Hi,
I have a question that I believe is more on the practical than theoretical side.
Say we have an asset in EUR and a forward contract on this asset which is to be paid in USD.
In most theoretical models (at least the ones I know of) there is only one risk free interest rate for each country and you can replicate the forward contract in two ways:
1/ Borrow EUR, buy the asset and enter a forward fx contract. You will have to pay some amount of USD in the future which should equal the forward price.
2/ Borrow USD, convert it at the fx spot rate to get EUR and buy the asset. You will have to pay some amount of USD in the future which should equal the forward price.
Theoretically these two approaches should give the same price. However, in practice you are able to borrow at a better interest rate if you put the asset as collateral (i.e. at the repo rate). Is there a repo market where you can place EUR-assets as collateral when borrowing USD? If not, the prices computed with 1/ and 2/ above would obviously differ.
How are these contracts priced in practice?
My question is how this works in practice. Is there a repo market where you can place EUR-assets as collateral when you borrow USD?
I have a question that I believe is more on the practical than theoretical side.
Say we have an asset in EUR and a forward contract on this asset which is to be paid in USD.
In most theoretical models (at least the ones I know of) there is only one risk free interest rate for each country and you can replicate the forward contract in two ways:
1/ Borrow EUR, buy the asset and enter a forward fx contract. You will have to pay some amount of USD in the future which should equal the forward price.
2/ Borrow USD, convert it at the fx spot rate to get EUR and buy the asset. You will have to pay some amount of USD in the future which should equal the forward price.
Theoretically these two approaches should give the same price. However, in practice you are able to borrow at a better interest rate if you put the asset as collateral (i.e. at the repo rate). Is there a repo market where you can place EUR-assets as collateral when borrowing USD? If not, the prices computed with 1/ and 2/ above would obviously differ.
How are these contracts priced in practice?
My question is how this works in practice. Is there a repo market where you can place EUR-assets as collateral when you borrow USD?
