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An Australian investor holds a one month long forward position on USD. The contract calls for...

An Australian investor holds a one month long forward position on USD. The contract calls for the investor to buy USD 2 million in one month’s time at a delivery price of $1.4510 per USD. The current forward price for delivery in one month is F= $1.5225 per USD. Suppose the current interest rate interest is 5%. What is the value of the investor’s position?

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Answer #1

Contracted forward rate, FC = $1.4510 per USD

The current forward price for delivery in one month is F= $1.5225 per USD

Quantum of USD involved, Q = USD 2 mn

Gain / (Loss) on investor's position in 1 month time = (FC - F) x Q = (1.4510 - 1.5225) x 2,000,000 = - $ 143,000

Interest rate, R = 5%

Time, N = 1 month = 1 / 12 year

Hence, Value of the investor's position = PV of the gain / (loss) in 1 month = - $ 143,000 / (1 + R)N = - 143,000 / (1 + 5%)1/12 = - $ 142,420

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