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8 March, 22:13

You just sold a futures contract on €. Each contract is for €125,000 and the price you sold for the € is $1.20 for each €. What is your profit/loss if the spot rate when the contract matures is $1.10?

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  1. 9 March, 00:45
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    The profit is $12,500

    Explanation:

    The profit on the contract can be computed using the formula below:

    profit/loss on the contract = (forward price-spot rate) * volume of currency sold

    forward price is 1 euro to $1.20

    spot price 1 euro to $1.10

    volume of currency sold is Euros 125,000

    profit/loss on the contract = ($1.20-$1.10) * 125,000

    =$12,500

    Invariably the trader sold each US dollar $0.10 more than the spot rate ($1.20-$1.10), when that is multiplied the volume of Euros sold, it gives $12,500 in profit.

    This implies that the buyer could have bought the currency cheaper on contract date
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