1. Forwards and futures

a. Compare and contrast forward and futures contracts and discuss how can they be used by corporations?

b. Fargo Co. purchases imports that have a price of 300,000 Turkish liras, and it has to pay for the imports in 30 days. How can Fargo Co. use currency futures contracts (forward rate is $0.22 TL) to hedge against exchange rate risk? What if after 10 days of entering in a forward contract (forward rate now is $0.20 TL) the business transaction (to import) is canceled? How much profit/loss the firm will make after these transactions?

c. Moorhead Exports company receives 100,000 euros each month as payment for the products it exports to Spain. How can the company use forward contracts to hedge against exchange rate risk? If spot rate is EUR/USD = 1.20, 30-day forward rate is EUR/USD=1.22; what is the maximum total dollar amount the company can receive?

d. Assume that a December futures contract on Mexican pesos was available in October for $0.06 per unit. If speculators expected that spot rate of Mexican peso in December will be $0.075, how can they capitalize on this situation assuming zero transaction costs?