You believe that the Australian dollar (AUD) will depreciate against the US doll

Question

You believe that the Australian dollar (AUD) will depreciate against the US dollar. You want to utilize futures contracts to speculate on this move and take a position worth 500,000 AUD. One (1) contract = 100,000 AUD The Spot Rate used when you open your position is $0.90/AUD The following are the daily closing $/AUD rates used to calculate the value of your account.

Open Account ($/AUD) 0.90

Day 1 0.92

Day 2 0.92

Day 3 0.91

Day 4 0.93

Day 5 0.89

Day 6 0.88

Day 7 (Close Account) 0.87

QUESTION A : What type of position would you take: Long or short?

QUESTION B: What actions will you need to take given your strategy? BE VERY SPECIFIC!!!!

QUESTION C: How much profit/loss did you make during the seven trading days. Show your calculations.

Explanation / Answer

A. Since you are anticipating that AUD value will depreciate, you have to Short this in order to make profits.

B. Buy USD on day 0. Since 1 contract size is of 100,000 AUD, you have to buy 5 contracts. Value of USD you have in your account = 500,000 * 0.9 = $450,000

C. You have $450,000 after buying USD from AUD.

On Day 1, Exchange rate is changed to 0.92, i.e. your USD 450,000 is worth 450000 / 0.92 = 489130.43

You make a loss on Day1

Similarly following table shows loss/gain on each day

On 7th day, total profir made = AUD 17,241.38

Day Rate AUD Loss / Gain 0 0.9             500,000.00 0 1 0.92             489,130.43      (10,869.57) 2 0.92             489,130.43      (10,869.57) 3 0.91             494,505.49        (5,494.51) 4 0.93             483,870.97      (16,129.03) 5 0.89             505,617.98           5,617.98 6 0.88             511,363.64        11,363.64 7 0.87             517,241.38        17,241.38

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