Question

A trader believes that the euro will depreciate versus the yen. She wants to use a forward contract to potentially profit from her view. The spot rate is ¥0.10/€ and the forward rate is ¥0.08/€.

Should she buy or sell a forward on euros?

If the spot rate finished at ¥0.12/€ then calculate her profit/loss

If the spot rate finished at ¥0.05/€ then calculate her profit/loss

Answers:

• Buy euros forward; ¥0.04/€ profit; -¥0.03/€ loss

• buy euros forward; -¥0.02/€ profit; ¥0.05/€ loss

• sell euros forward; ¥0.02/€ profit; -¥0.05/€ loss

• buy euros forward; -¥0.02/€ loss; ¥0.05/€ profit

• Sell euros forward; -¥0.04/€ loss; ¥0.03/€ profit

Answer 1

The trader believes that the euro will depreciate versus the yen. The trader has to sell euros in the forward market to gain from the belief.

The forward rate = Yen 0.08/ Euros

The trader will benefit if the exchange rate goes below the forward rate and will have to suffer loss if the spot rate will be more than the forward rate

when Spot rate Yen 0.12/ Euros , the trader suffers a loss of  Yen 0.04/Euros

when Spot rate Yen 0.05/ Euros , the trader has a profit  of  Yen 0.03/Euros

So the answer is

• Sell euros forward; -¥0.04/€ loss; ¥0.03/€ profit