2. On 2/1/XX, GM sold a three-month forward contract for 250 million Swiss Franc

Question

2. On 2/1/XX, GM sold a three-month forward contract for 250 million Swiss Francs to CitiCorp, Based on this transaction, indicate which statement listed below is true.

a. On 5/1/XX, GM will have to pay S1,875, 250 to CitiCorp

b. On 2/1/XX, GM will have to deliver 250 million Swiss Francs to CitiCorp

c. On 5/1/XX. CitiCorp will have to pay S1,875,250 to GM

d. On 5/1/XX. CitiCorp will have to deliver 250 million Swiss Francs to GM

E. On 5/1/XX. CitiCon will have to pay S150,550,000 to GM

3. Based on the information presented in the question above, what is the total dollar profit/loss in the forward market transaction for GM? Please indicate the dollar amount, and also if it is a profit or a loss

A. S 196,000/gain

B. S 204.000/loss

C. S 100,000/gain

D. S 196,000/loss

-month torward 6-months forwir14143 140 Jatirbrn_ 1098 1.4414 cmonths foard 1430 1438 1-math mard___ .007 .007554 3-months lowad .007501 .007574 6-manths forward007537 007611 3-months torert-- M2 20 1. If you were a currency speculator who could perfectly foresee 3 months into the future (foresee 5/1 XX), based on the information presented above, would you rather take a long (buy Swiss Francs) or a short position (sell Swiss Francs) in the three-month forward contract for Swiss Franes on 2/1/Xx7 a. Long b. Short

Explanation / Answer

Solution:

On 2/1/XX- Tueseday price is taken for consederation

Swiss Franc Spot Price- 0.6020

1 -month Forward- 0.6021

3 -month Forward- 0.6022

6-month Forward- 0.6024

On 5/1/XX- Monday price is taken for consederation

Swiss Franc Spot Price- 0.6018

1 -month Forward- 0.6019

3 -month Forward- 0.6023

6-month Forward- 0.6034

Q1.

If I am able to foresee the future so I would know that on 01/05/XX the spot price would be 0.6018. That means the value of Swiss franc would reduce (depreciate) because as on 01/02/XX, 3-month forward is selling at $0.6022. So I would sell the swiss franc or short it to gain from the transaction.

We would sell it at 0.6022 and buy at 0.6018 to gain the 0.0004.

Correct answer: Short

Q2.

GM is selling 250 million 3-month forward contract of swiss franc on 2/1/XX

So it means

Seeing all the options, only option E looks correct.

Q3.

Since GM is gaining 0.004 on each swiss franc ( Selling forward at 0.6022 while the spot rate is 0.6018 after 3 months )

S0, total gain =  0.004 * 250 million = $100,000

Option C is correct gain of $100,000

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