1) The Mexican peso futures contract is trading at 0.07713 $/MXN. Contract size

Question

1) The Mexican peso futures contract is trading at 0.07713 $/MXN.  Contract size for the Mexican peso future is 500,000 pesos.  You believe the spot price will be 0.08365 $/MXN at expiration.   What speculative position would you enter into to profit from your beliefs?  Calculate your anticipated profits assuming you take a position in three contracts.  What is the size of your profit or loss if the futures price is indeed an unbiased predictor of the future spot price and this price materializes?

2) Do problem 1 again assuming you believe the spot price will be 0.07061 $/MXN.

Explanation / Answer

1)

The Mexican peso futures contract is trading at 0.07713 $/MXN.  

Spot price will be 0.08365 $/MXN at expiration.

The rate from 0.07713$/MXN to 0.08365$/MXN indicates that dollar is depreciating against MXN

we have to buy futures today @ 0.07713$/MXN

As we are going to buy 3 contracts, total profits will be:

3 x 500000 pesos x (0.08365 - 0.07713) = $9677

Answer : profits : $9677

2)

now if rate is 0.07061$/MXN, we have to sell futures

As we are going to sell 3 contracts, total profits will be:

3 x 500000 pesos x (0.07713 - 0.07061) = $9780

Answer : $9780

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