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?

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