Question

In: Finance

You have three months future contract of 100,000 TL, the forward rate is $0.148/PTL, and you believe that the value of the Turkish Lira (TL) will fall.

You have three months future contract of 100,000 TL, the forward rate is $0.148/PTL, and you believe that the value of the Turkish Lira (TL) will fall. Assume that at the maturity date (three months later) the spot rate is $0.140/PTL. Should you take a short or long position, and how much will be the value?

Solutions

Expert Solution

Three months future contract is for 100,000 TL

 

Forward rate = $0.148 per TL

 

Our belief is that value of Turkish Lira will fall, So we have to sell it (short) at fixed higher price now and purchase it (Long) in future when price declines to get an arbitrage profit.

 

Take a short position(Sell) at fixed forward rate now

100,000 TL * $0.148 = $14800

 

After 3 months take a long position (Buy)

             Spot rate = $0.140

100,000 * $0.140 = $14000

 

Gain = $14800 - $14000 = $800

 

Conclusion : Take a short position now.

Take a short position now.

Nabeel answered 1 year ago
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