Question

Question 1 It is early September and you decide to go explore Chile at the end of November (November 29th to be exact). You budget that your Chile trip will cost 2,000,000 Chilean Peso (CLP). A futures contract for 2,000,000 Chilean Pesos is available with a maturity of November 29th and a futures price of F, = 665 CLP/USD. (a) Explain why you may want to enter into the futures contract. When you enter into the futures contract what are you agreeing to do? U.S. Dollar/Chilean Peso (AUSDCLP) 674.320.58 (0.09%) 18:24 CT FOREX) 674.40 NA 675.40 N/A INTERACTIVE CHART for Thu Nov 29th 2018 AUSDCLP GO Study Tools Settings 1D SO IMM Help Alerts Watch Templates She Clear M TY SY 20 Daly 3M USD/CLP (*USDCLP) - Barchart.com 690.00 685.00 680.00 660.00 Sep 3 Sep 10 Sep 17 Sep 24 s o at 22 Nov NOV 12 NOV 19 Nov 23 (6) Consider the evolution of the CLP/USD exchange rate above. Did you make or lose money on the futures contract? How much? With the benefit of hindsight was it advantageous to enter into the futures contract? Discuss. (c) Your plan changes and you instead embark on your trip on October 1. How can you exit the futures contract? How much money did you make (lose) on the futures contract? Was it advantageous to have entered into the futures contract? (d) Your buddy says you should avoid the futures contract due to counterparty risk. Do you agree? Explain why or why not.

Answer 1

a]

You would enter into the futures contract to lock into a price at which Pesos can be bought.

When you enter into the contract, you are agreeing to sell USD and buy Pesos at the contract price.

b]

You made money on the futures contract.  

Profit = price on November 29th - price at which contract is bought

Profit = 674.32 - 665 = 9.32

No, it was not advantageous to have entered into the futures contract. This is because the USD appreciated, and hence each USD bought more Pesos.  

c]

The futures contract can be exited by selling the contract.

Profit on contract = price at which contract is sold - price at which contract is bought

Profit on contract = 658 - 665 = -7

Yes, it was advantageous to have entered into the contract because the USD depreciated.

d]

No, I do not agree.

Currency futures are standardized contracts traded on exchanges with a regulated settlement mechanism and margin requirements. Counterparty risk in currency futures is very low and it is not a significant risk factor.