Use the following information to answer the next two questions. A currency trade
ID: 2712418 • Letter: U
Question
Use the following information to answer the next two questions. A currency trader believes the yen will appreciate relative to the dollar in three months. The current spot rate for yen is $.005/yen and the six month forward rate is $.0062/yen. The currency trader agrees to enter into a three month forward contract with 100 million yen attached. The spot rate is $.0055/yen on the day the forward contract expires. What is the currency trader's profit/loss (in USD) from his forward contract?
Instead of using the forward contract, suppose the currency trader used the spot market to trade based on his belief. What would have been his profit/loss(in USD) at the end of the three month period?
a. -50,000
b. 50,000
c. 120,000
d. -70,000
A forward contract gives its buyer the option to conduct a transaction involving another security or commodity.
True
False
A forward contract gives its buyer the option to conduct a transaction involving another security or commodity.
Explanation / Answer
Case A: If he purchases the forward contract:
Spot at the time of expiry: 1 yen = 0.0055$ Hence 100 Million yen = $550,000
future contract: 1 yen = 0.0062$. Hence 100 Million yen = $620,000
Hence total loss = $70,000
Case 2: If he went for the spot market
Spot at the beginning: 1 yen = 0.0050$ Hence 100 Million yen = $500,000
Spot at the end:1 yen = 0.0055$ Hence 100 Million yen = $550,000
Hence Loss of 50,000
The statement is False: A forward contract gives its buyer the option to conduct a transaction involving SAME security or commodity.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.