Question

An investor enters into a short forward contract to sell 100,000 British pounds for US dollars at an exchange rate of 1.5000 US dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.4900 and (b) 1.5200?

Answer 1

Answer:

(a) gain $1,000.

(b) lose $2,000.

Explanation:

If the investor's contract states that he should sell British pounds for US dollars at an exchange rate of 1.5000 US dollars per pound, he will gain money if the exchange rate falls below that value and lose if it rises above it.

(a) 1.4900

$G = 100,000*(1.500 - 1.4900) = \ 1,000$

The investor would gain $1,000.

(b) 1.5200

$L = 100,000*(1.5200 - 1.5000) = \ 2,000$

The investor would lose $2,000.