I would like to understand the math/economics behind the calculation of plain vanilla FX forwards.
Let's assume the following example:
- The deal is traded on 2021.01.01 (t=0) - Party A agrees to buy 1.000.000 CAD and sell 800.000 USD on June 30th 2021 - The CAD riskfree interest rate is 0.50 % p.a. - The USD riskfree interest rate is 1.25 % p.a. - USD/CAD spotrate on 2021.01.01 is 0.8950 - USD/CAD spotrate on 2021.01.30 is 0.9230 (t=1) - EUR spot rate on 2021.01.30 is EUR/CAD 1.22330
How to calculate the NPV in EUR as of 2021.01.30?
So from what I've understood is that the NPV at 2021.01.01 would be zero in practice because of market mechanisms that avoid arbitrage basically.
But how to calculate the NPV? Somehow I guess I have to calculate forward rates and use the deviation of the forward rates between t=0 and t=1 to approach the NPV?
How would this translate to the example given?