Financial Positions Essay

873 WordsJul 11, 20144 Pages
FORWARD CONTRACT PROBLEMS EXAMPLE 9.2 Speculating and Hedging with Currency Futures Suppose a trader takes a position on August 19, 2002, in one December 2002 CD futures contract at $0.6336/CD. The trader holds the position until the last day of trading when the spot price is $0.6200/CD. This will also be the final settlement price because of price convergence. The trader’s profit or loss depends upon whether he had a long or short position in the December CD contract. If the trader had a long position, and he was a speculator with no underlying position in Canadian dollars, he would have a cumulative loss of $1,360 [ ($0.6200 $0.6336) CD100,000] from August 19 through December 18. This amount would be subtracted from his margin account as a result of daily marking-to-market. If he takes delivery, he will pay out-of-pocket $62,000 for the CD100,000 (which have a spot market value of $62,000). The effective cost, however, is $63,360 ( $62,000 $1,360), including the amount subtracted from the margin money. Alternatively, as a hedger desiring to acquire CD100,000 on December 18 for $0.6336/CD, our trader has locked in a purchase price of $63,360 from a long position in the December CD futures contract. If the trader had taken a short position, and he was a speculator with no underlying position in Canadian dollars, he would have a cumulative profit of $1,360 [$0.6336 $0.6300) CD100,000] from August 19 through December 18. This amount would be added to his margin account as a result of daily marking to market. If he makes delivery, he will receive $62,000 for the CD100,000 (which also cost $62,000 in the spot market). The effective amount he receives, however, is $63,360 ( $62,000 $1,360), including the amount added to his margin account. Alternatively, as a hedger desiring to sell CD100,000 on December 18 for $0.6336/CD, our trader has

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