Question

A bank is short a futures contract on 1,000,000 Euro with F= $1.5 million maturing in...

A bank is short a futures contract on 1,000,000 Euro with F= $1.5 million maturing in one year. The value of this position may decline if:

The Euro appreciates against the dollar

The Euro depreciates against the dollar

The bank faces zero risk because the futures prices is locked in
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Answer #1

The correct option is -  The Euro appreciates against the dollar

The value of a short position in a futures contract will decline if the price of the underlying asset rises.

In the case of a currency futures contract, the value of a short position will decline if the exchange rate of th underlying currency rises. In this case, if the $/€ exchange rate rises, the value of a short position will decline.

If the $/€ exchange rate rises, it means that the € has appreciated because each € can buy a higher amount of $.

Therefore, the correct option is "The Euro appreciates against the dollar"

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