Question 1

1. In October 2019 or today, you are looking at a Euro Futures contract:

Maturity: Due on the 3^rd Wednesday of March 2020

Size: 125,000

Futures rate today: $1.12/

If you believe the spot rate would be $1.15 in March 2020, then you should ____ (Buy or Sell) the futures.

True or False _________: if you buy the futures today and do nothing until the maturity day, then you will need to buy 125,000 at $1.12/ in March 2020.

True or False _________: if you buy the futures today and do nothing until the maturity day, then you will need to sell 125,000 in the spot market at whatever the prevailing rate is, assuming you are a speculator in the FX market.

B. In November 2019 (supposedly), Euro shows a strong trend to appreciate, and the futures rate in November becomes $1.15/

If you change to believe the spot rate would be $1.09 in March 2020, then you should ____ (Buy or Sell) the futures.

True or False _________: if you buy the futures in November 2019 and do nothing until the maturity day, then you will need to buy 125,000 at $1.12/ in March 2020.

True or false _________: if you have bought the futures in October and are selling the futures in November, then you will need to use the spot market to clear your position.

C. If you have traded the futures in (a) and (b) according to your beliefs at the time of trading, what would be your overall profit?

Question 2

The current spot exchange rate is $ 1.93/pound and the three-month futures rate is $1.90/pound. Assume that you would like to buy or sell British Pound for the amount of 1,000,000 pounds.

On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.91/pound in three months. What actions do you need to take to speculate in the futures market? And what is the expected dollar profit from speculation?

What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to $1.86/pound?