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Suppose that today an individual obtains a 6-month forward contract to sell ¥22,340,000 at $.009343 per...

Suppose that today an individual obtains a 6-month forward contract to sell ¥22,340,000 at $.009343 per ¥. In 6 months the individual will offset the contract, and on this date the spot rate is $.009106 per ¥. Explain the process of offsetting the initial position and calculate the profit or loss.

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Answer #1

Forward Contract Tenure = 6 months, Under the contract the investor will sell ¥ 22340000, Current Spot Rate = $ 0.009343/¥

An offsetting position would involve entering into a forward position opposite to the initial position. Therefore, the investor will buy a forward contract to offset the initial sale position. Spot Rate at Offsetting = $ 0.009106 / ¥

Gain on Transaction = (0.009106 - 0.009343) x 22340000 = - $ 5294.58 (a negative sign indicates a loss)

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