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Today, one needs to pay 130 US dollars for 100 euros. The continuously compounded US interest...

Today, one needs to pay 130 US dollars for 100 euros. The continuously compounded US interest rate is 1% and the continuously compounded euro interest rate is 2%.

(1) What is the 9-month forward price for 100 Euros?

(2) Suppose you will receive 2 mln US dollars and 1 mln. euros in six months. The current forward price of a forward contract that matures in six months is F0,6mth = 1.2935 USD per 1 euro. Suppose you short eight forward contracts today (the contract size is 125,000 Euro). How many USD and euros will you have in six months?

Expert Solution

(1)

Current spot rate is 130 USD= 100 EURO

=>100 EURO= 130 USD

=>1 EURO = 1.3 USD

continuously compounded US interest rate is 1%.

continuously compounded euro interest rate is 2%.

As per Interest rate Parity Theorem, the size of the forward rate depends upon its interest rates.

9 month Forward rate1 EURO=

=>9 month Forward rate1 EURO= 1.29 USD

9-month forward price for 100 Euros = 100*1.29 USD = USD 129

--------------------------------------

(2)

amount to be received after 6 months = 2000000 USD and 1000000 EURO

Curently you had sold forward contract @ 1.2935 USD per 1 euro.

It measn after 6 months You will exchange the EURO to be received with the USD.

contract size is 125,000 Euro

Total Forward contract = 1000000 EURO/125000 EURO = 8 Contract.

After 6 month 1000000 EURO to be Exchanged with USD = 1000000 EURO* 1.2935 USD/EURO = USD 1293500.

After 6 months You will have = 2000000 USD+1293500 USD = 3293500 USD and ZERO EURO.

jeff jeffy answered 1 year ago

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