The current spot rate between euros and dollars is €1.25/$. You believe that the

Question

The current spot rate between euros and dollars is €1.25/$. You believe that the euro will depreciate relative to the dollar over the next six months and you'd like to use the forward market to trade based on your belief. You enter into a forward contract that has 500,000 euros attached. The forward rate is $.95/€. Find your profit/loss on your forward contract (in terms of dollars) if the spot rate is €1.2/$ at expiration. Round intermediate steps to four decimals. Do not use the dollar sign when inputting your answer.


(how would I solve this)

Explanation / Answer

The bond cost E500000/$1.25 = $400000

Change in spot rate =1.2-1.25=-0.05

The spot rate was depreciated by 0.05.

Change = ( 0.95– 1.2) = -0.25

The dollar has depreciated by 0.05 but the forward contract is rated at 0.95 so, this contract provides loss .

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