The three-month futures price for the British pound is $1.3370/E. You expect the
ID: 2817351 • Letter: T
Question
The three-month futures price for the British pound is $1.3370/E. You expect the spot price three months from today to be $1.2690/E. The British pound contract size is £62,500. If you decide to buy 30 British pound futures contracts, how much money do you need today as your initial investment other than the margin you need to post? If you have available $375,000 to speculate in the futures market as a buyer, how many contracts can you buy assuming no margin requirement? How much profit would you make if you buy 30 contracts and the spot price of the pound at futures expiration ended up at $1.2690/ If you were a MNC and you buy your raw materials and parts from a supplier in London for £12 million that are du a. b. c. d. n three months, would you K buy or sell the pound futures if you decide to hedge your position? How many contracts would you buy or sell? What would be the dollar value of your imports whenthe pound payment is due? e. f. How much would be your profit/loss from the foreign exchange transaction if the spot rate three months from today ended up at $1.2690/E?Explanation / Answer
Soln : a) While investing in future contracts, one must have to kept some margin defined by the brokers that can be different and as per brokers policy and discretion.
Here it is saying the amount required today other margin, this should be nil/0 as other than margin amount is required only at contract expiration.
b) Amount that can be invested = $375000, three month future price = 1.3370/£ , future contract size = £62500
No. of contracts that can be bought = 375000/(62500*1.3370) = 4.49 or we can say 4 contracts in total.
c) Bought 30 contracts, future price/realization price = 1.3370/£ , spot price become 1.2690/£
Profit/loss realized at expiration = (1.2690-1.3370)*30*62500 = -$127500
d) As in here I am buying raw material from London based supplier, need to make payments to him after 3 months in £ , so we need to hedge the increase in exchange price i.e. we need to fix the liability at certain price in £. We can say in this case , we need to by british pound contracts to hedge the risk associated.
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