Question

10)You enter a long position in a € future contract with the size of €125,000 today. The futures expire in 90 days. The interest rates are i_$=2% and i_€=4%. The current spot rate is $1.38/€. Assume 360 days a year. If the spot rate is $1.43/€ the next day and interest rates remain the same, How much is your profit or loss for this day?

Select one:

a. $6228.80

b. $3974.78

c. $6250

d. -$6228.80

e. -$3974.78

9) The interest rate for Swiss Franc is i_SF=12% and for Japanese yen is i_¥=10%. The expected inflation rate in Switzerland for the next year is 5%. According to the International Fisher Effect, the expected inflation rate and real interest rate in Japan for next year are respectively,

Select one:

a. 3.5% and 7.0%

b. 2.1% and 4.1%

c. 2.0% and 5.0%

d. 7.0% and 7.0%

e. 3.1% and 6.7%

Answer 1

10)

As per Inerest Rate Parity, Futures Rate of $/Euro = Spot Rate of $/Euro * [1+Interest Rate on $]/[1+Interest Rate on Euro]

Therefore,

Futures Rate on Entry day = 1.38*[1+(0.02*90/365)]/[1+(0.04*90/365)] = 1.38*1.00493/1.009863 = $1.3733/Euro

Futures Rate on the next day = 1.43*[1+(0.02*89/365)]/[1+(0.04*89/365)] = 1.43*1.0048767/1.00975 = $1.4231/Euro

Profit for the day = (Futures Rate on next day-Futures Rate on Entry day)*Position Size = (1.4231-1.3733)*125000 = $6225 which is equivalent to Profit of $6228.80

Note: As per GUIDELINES, we are supposed to answer ONLY 1 QUESTION.