Reference no: EM132465478

Question 1: The three-month futures price for the British pound is $1.3160/£. You expect the spot price three months from today to be $1.2690/£. The British pound futures contract size is £62,500.

a. If you are a speculator would you buy the futures contracts or short (sell) them. Explain.

b. How much profit would you make if you trade 62 contracts and your expectations come true?

c. If you were an MNC with A/R (accounts receivables) of £24 million due in three months that you want to hedge, would you buy or sell the pound futures. Explain.

d. How many contracts would you be able buy or sell? How much would be your pound A/R worth in dollars?

Question 2: The three-month futures price for the British pound is $1.3160/£. You expect the spot price three months from today to be $1.3680/£. The British pound contract size is £62,500.

a. If you decide to buy 68 British pound futures contracts, how much money do you need today as your initial investment other than the margin you need to post?

b. If you have available $1.4 million to speculate in the futures market as a buyer, how many contracts can you buy assuming no margin requirement?

c. How much profit would you make if you buy 68 contracts and the spot price of the pound at futures expiration ended up at $1.3260/£?

d. If you were an MNC and you buy parts and raw materials from a supplier in London at £11.25 million that are due to be paid by you in three months, would you buy or sell the pound futures if you decide to hedge your position?

e. How many contracts would you buy or sell? What would be the dollar value of your imports when your pound payment is due?

f. How much would be your profit/loss from the foreign exchange transaction if the spot rate three months from today ended up at $1.3240/£?