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Homework answers / question archive / Compute the value (Mark-to-market) of the following long forward contract in Australian dollars (AUD)
Compute the value (Mark-to-market) of the following long forward contract in Australian dollars (AUD). The contract expires in one year. The size of the contract is AUD 500,000; the forward rate F1USD/AUD = 0.72, the current spot rate X USD/AUD = 0.65, and the two one-year interest rates are as follows: rAUD= 6% and rUSD = 4%. The mark-to-market value is …
A. Negative USD 46,369.52
B. Positive USD 46,369.52
C. Positive USD 39,550.08
D. Negative USD 39,550.08
CURRENT FORWARD RATE = 0.72 USD/AUD
CONTRACT SIZE = AUD 500000
CURRENT SPOT RATE = 0.65 USD/AUD
RATE OF AUD = 6%
RATE OF USD = 4%
FORWARD PRICE = SPOT PRICE *(1 + USD RATE / 1 + AUD RATE )
= 0.65 * (1.04/1.06)
= 0.63774 USD / AUD
IT IS A LONG FORWARD CONTRACT. THE INVESTOR WILL PROFIT ONLY IF THE FORWARD PRICE INCREASES AFTER ONE YEAR BUT THE FORWARD PRICE DECREASES
THEREFORE, THE INVESTOR MAKES LOSES.
MARK TO MARKET VALUE = (0.63774- 0.72)/ 1.04 * 500000
=(-0.08226/1.04) * 500000
= -0.07910 * 500000
= -39550.07257
OPTION D IS THE CORRECT ANSWER.
NEGATIVE USD 39550.08.
