Question

The current spot exchange rate is $1.45/£. The three-month forward rate is $1.40/£. An investor shorts £1,260. At maturity, the spot rate is $1.50/£. The gain or loss (−) on this transaction is:

Multiple Choice

• $126.

• £126.

• −$126.

• None of the options.

• −£126.

Answer 1

Current exchange rate

1 Pound

1.45 dollars

3 month forward rate

1 Pound

1.40 dollars

Shorting 1260 pounds would mean selling 1260 pounds

Then investor would receive

1827

dollars

(1260*1.45)

Then the investor would enter into a forward contract to buy 1260 pounds at 1260*1.40 =

1764

dollars

in 3 months

At end of 3 months, the rate is

1 pound

1.50 dollars

So to buy 1260 pounds would require 1260*1.50 dollar

1890

dollars

So loss is

126

dollars