The three month futures price for the british pound is $1.3370/pound. You expect

Question

The three month futures price for the british pound is $1.3370/pound. You expect the spot price three months from today to be $1.2690/pound. The British pound contract size is 62,500 pounds.

a) if you have $375,000 available,to speculate in the futures market as a buyer, how many contracts will you buy?

b)how much profit will you make if you buy 30 contracts and the spot price at the futures expiration ended up at $1.2690/pound?

c) if you were an MNC and buy have 12 million pounds that are due to be paid to you in 12 months, do you buy or sell pound futures to hedge your position?

d) how many contracts would you buy or sell? from (c) what would be the dollar value of your imports when the pound payment is due?

e)how much profit or loss from the foreign exchange transaction if the spot rate three months from today ended up at $1.2690/pound?

Explanation / Answer

a)

Future Price = $1.3370/Pound

Spot Price at expetation = $1.2690/Pound

Expected profit from one future contract= $1.3370-1.2690 = $ 0.068

On the settlement date I need to buy number of pound contracts = $ 375000/(1.2690*62500) =4.728 = 5 Contracts.

b)) Profit on one contract = (62500*0.068/1.2690)*30 Pounds = 100472.813 Pounds

c)) Since pound is expected to be cheaper, I will sell Pounds future contracts.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.