Question

Calculate the gain or loss to the holder and to the writer of the forward contract who agrees to buy foreign currencies at a specific price. Assume that on May 1, the writer of the forward contract agrees to sell 3,000,000 foreign currencies at a specific price of $0.22 per foreign currency (FC) with delivery in 30 days (May 31). Assume the spot rate at the end of the forward period is $0.20. What is the entry to the holder on May 1. Explain how the value of the forward contract changes over time

Answer 1

When the investor sells forward contracts on 1st may

Cash inflow= 3000000*0.22$ = $660000

Entry on May 1, Bank A/c Dr. 660000

To forward contract payable cr 660000

Gain to the writer of the contract= forward price - spot price on delivery date

= 3000000(.22-.2)= $66000

Part II-

Many factors affect the price of futures, such as interest rates, storage costs, and dividend income.
The futures price of a non-dividend-paying and non-storable asset is the function of the risk-free rate, spot price, and time to maturity.
Assets that are expected to pay an income will decrease the price of the futures.
Storage costs always increase the futures price as the seller of the futures incorporates the cost into the contract.
Convenience yields, which indicate the benefit of owning another asset rather than the futures, decrease the futures price.