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Hi sir,
I would like to ask for currency future contract. If we are UK company and going to receive 1m euros in 6 months. Thus, I am going to enter into euro future contract (sell) at the rate of 1.24 euros per pound. After 6 months, euros has depreciated to 1.25 euros per pound so I am going to buy the future contract back at the rate of 1.25. It end up with I am having future profit of how much?? because the exchange rate is euros per pounds so I have to use what rate to convert the 1m euros into pounds 1st in order to calculate the future profits using the (Buy rate 1.25 euro per pound – sell rate 1.24 euro per pound)?
because I am curious how to get back use (1,000,000/1.24) = 806,452
The spot market + future profits= must be the same amount with the selling rate of 1.24 euro per pound which is equal to 806,452 ???
Am I correct?Hope to solve my confusion.
Since the profit is in euros you will be selling the euros and will therefore convert at the euro spot sell rate on the date the futures contract is closed.
However, most exam questions there days expect you to use the lock-in rate to calculate the net effect of both the conversion and the profit or loss on futures, because usually you are not told the spot rate on the date of the transaction.
All of this Is explained in my free lectures on foreign exchange risk management.
so if I assume that the spot rate is equals to future rate at the date of transaction, meaning that use (1.25-1.24) x (1m/1.25)=8000 pounds to get future profits. also, leave the transaction at risk using spot rate (1m/1.25)=800,000 pounds. in total, i get 808,000
why I cannot get back the same answer by using (1m/1.24)=806,452?
Which part I do it wrongly?
can help me to rectify ?
thankss
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