Question

1) The Mexican peso futures contract is trading at 0.07713 $/MXN.  Contract size for the Mexican peso future is 500,000 pesos.  You believe the spot price will be 0.08365 $/MXN at expiration.   What speculative position would you enter into to profit from your beliefs?  Calculate your anticipated profits assuming you take a position in three contracts.  What is the size of your profit or loss if the futures price is indeed an unbiased predictor of the future spot price and this price materializes?

2) Do problem 1 again assuming you believe the spot price will be 0.07061 $/MXN.

Answer 1

1) If one expect Mexican peso to rise from $0.07713 to $0.08365 per MXN then he/she should enter into long position in futures since the futures price of $0.07713 is less than expected spot price
Profit from future contract = No of contract x (0.08365 - 0.07713) X Contract size
=3 x 0.00652 X 500,000
= $ 9780

If the futures price is an unbiased predictor of the expected spot price, then expected spot price is the futures price of $0.07713 per MXN, thus there will be no profit or loss from buying the future contract

2) If one expect Mexican peso to fall to $ 0.07061 from $0.07713 per MXN then he/she should enter into short position in futures since the futures price of $0.07713 is more than expected spot price
Profit from future contract = No of contract x ( 0.07713- 0.07061) X Contract size
=3 x 0.00652 X 500,000
= $ 9780