Question

You are a foreign exchange trader with a trading authority of US$ 7,000,000. You think that the New Zealand Dollar is about to depreciate. You decide to use the futures market (The Chicago Mercantile Exchange) to make a bet.

1. The spot NZD is USD/NZD 0.7190
2. The December NZD contract is USD/NZD 0.7185
3. The NZD contract size is NZD 100,000.

1.You would most likely,

Buy futures contracts at USD/NZD 0.7200.Buy futures contracts at USD/NZD 0.7185.Sell futures contracts at USD/NZD 0.7190.Sell futures contracts at USD/NZD 0.7185

With how many contracts?

2.It is now two months later and you decide to liquidate your position, taking either a profit or a loss.

1. The spot US$/NZ$ is 0.7205
2. The futures contract is US$/NZ$ 0.7200

You would,

Buy futures contracts at USD/NZD 0.7205.Buy futures contracts at USD/NZD 0.7200.Sell futures contracts at USD/NZD 0.7205.Sell futures contracts at USD/NZD 0.7200.

3. What is your profit?

Total profit?

Thanks!

Answer 1

1. Sell futures contracts at USD/NZD 0.7185

Since you expect the NZD to depreciate, enter a futures contract to sell NZD at 0.7185 USD. In December, if NZD actually depreciates, you would profit.

With 7,000,000/100,000 = 70 contracts

2. Buy futures contracts at USD/NZD 0.7200

To close the position, you take the opposite position. Since you sold NZD futures to open the position, now you buy the same futures to close the position and book a loss.

3. Profit = 0.7185 - 0.72 = -0.0015 USD per contract or a loss of 0.0015 USD per NZD.

Total profit = -0.0015 * 100,000 * 70 = -10500 USD or a loss of 10500

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