Question

A firm sells a currency future contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:

A. Purchasing a put option contract in the same currency.

B. Buying a futures contract with a different settlement date.

C. Buying an identical futures contract.

D. Selling a futures contract for a different amount of currency.

E. Selling an identical futures contract.

Answer 1

A firm sells a currency future contract means that it has entered into an agreement to sell the currency to another party. If company decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by taking an equivalent position but opposite to the contract that it already holds. Therefore it can close out its position by buying an identical futures contract.

Therefore, correct answer is option C. Buying an identical futures contract

Other options are not correct because -

• Purchasing a put option contract in the same currency. it is not opposite position, it is similar position
• Buying a futures contract with a different settlement date. It is not identical as settlement date is different
• Selling a futures contract for a different amount of currency. It is neither opposite nor identical.
• Selling an identical futures contract. It is not opposite position, it is similar position