Question

In: Finance

On May 6, 2013, the treasurer of a corporation enters into a long forward contract to...

On May 6, 2013, the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 1.5532

This obligates the corporation to pay $1,553,200 for £1 million on November 6, 2013

What are the possible outcomes?

Solutions

Expert Solution

There are 3 possible outcomes.

1. spot exchange rate on November 6, 2013 is lower than forward exchange rate 1.5532.

2. spot exchange rate on November 6, 2013 is higher than forward exchange rate 1.5532.

3. spot exchange rate on November 6, 2013 is equal to forward exchange rate 1.5532.

in 1st outcome, let's say exchange rate on November 6, 2013 is 1.5512.

in this case corporation will incur a loss because they have to pay $1,553,200 for £1 million whereas in the spot market they can bought £1 million by paying $1,551,200 (£1 million*1.5512). so they will incur loss of $2,000 ($1,553,200 - $1,551,200).

in 2nd outcome, let's say exchange rate on November 6, 2013 is 1.5552.

in this case corporation will have a profit because they have to pay $1,553,200 for £1 million whereas in the spot market they can bought £1 million by paying $1,555,200 (£1 million*1.5552). so they will have profit of $2,000 ($1,555,200 - $1,553,200).

in 3rd outcome, corporation will neither have profit nor loss because forward rate and spot exchange rate on November 6, 2013 will be the same.

jeff jeffy answered 3 months ago
Next > < Previous

Related Solutions

On May 6, 2013, the treasurer of a corporation enters into a long forward contract to...
On May 6, 2013, the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 1.5532 This obligates the corporation to pay $1,553,200 for £1 million on November 6, 2013 What are the possible outcomes?
A foreign exchange trader working for a bank enters into a long forward contract to buy...
A foreign exchange trader working for a bank enters into a long forward contract to buy one million pounds sterling at an exchange rate of 1.6000 in three months. At the same time, another trader on the next desk takes a long position in 16 three-month futures contracts on sterling. The futures price is 1.6000 and each contract is on 62,500 pounds. Within minutes of the trades being executed the forward and the futures prices both increase to 1.6040. Both...
P Company enters into a forward contract to sell foreign currency. At the contract date, the...
P Company enters into a forward contract to sell foreign currency. At the contract date, the forward rate is $1.20 and the spot rate is $1.24. BRIEFLY explain why this may not appear to be logical (and it doesn't), and why would P do this anyway.
Suppose an auto manufacturer in Michigan enters into a forward contract with a local distributor of...
Suppose an auto manufacturer in Michigan enters into a forward contract with a local distributor of auto parts for the purchase of 100,000 crankshafts at a price of $200. (5 pts.) a) What will happen on the delivery date? b) What is the possible benefit to each party (the auto manufacturer and the auto parts distributor) under this contract? c) Suppose on the delivery date the spot price turns out to be $250. Would the auto parts distributor still benefit...
A foreign exchange trader working for a bank enters into a long position in a forward...
A foreign exchange trader working for a bank enters into a long position in a forward contract to buy one million pounds of sterling at an exchange rate of 1.6000 in three months. At the same time, another trader on the next desk takes a long position in 16 three month futures contracts on sterling. The futures price is 1.6000, and a futures contract is on £62,500. The forward and the futures prices both increase to 1.6040 at the end...
An investor enters into a short 3 months’ forward contract to sell 100,000 British pounds for...
An investor enters into a short 3 months’ forward contract to sell 100,000 British pounds for US dollars. Table 2 Spot and forward quotes of the USD/GBP exchange rate Maturity Bid Offer Spot 1.2732 1.2736 1-month forward 1.2746 1.2751 3-month forward 1.2772 1.2777 1-year forward 1.2883 1.2889 Use Table 2 to indicate how much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.25 (b) 1.30 (c) Explain what is meant...
Forward Contract
A long forward contract that was negotiated some time ago will expire in three months and has a delivery price of $20. The current forward price for a three-month forward contract is $21. The three-month risk-free interest rate is 8%. What to the nearest cent is the value of the short forward contract? A) -$1.85 B) $2.00 C) -$0.98 D) $0.98
(a) Suppose you enter into a long 6-month forward position at a forward price of $60....
(a) Suppose you enter into a long 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70? (b) Suppose you buy a 6-month call option with a strike price of $60. What is the payoff in 6 months at the same prices for the underlying asset? (c) Comparing the payoffs of parts (a) and (b), which contract should be more expensive (i.e. the long call...
On December 15, 20x1, ABC Co. enters into a 30-day forward contract to buy 10,000 yens...
On December 15, 20x1, ABC Co. enters into a 30-day forward contract to buy 10,000 yens at the forward rate of $1.50. On December 31, 20x1, the forward rate was $1.25 and by January 15, 20x2, the spot rate moved to $1.60 Requirements: Provide the journal entries under each of the following scenarios: (A) the contract is settled by the actual purchase of yens; (B) the contract is settled through net cash payment.
A short forward contract on an asset plus a long position in a European call option...
A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to a)A short position in a call option b)A short position in a put option c)A long position in a put option d)None of the above
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT