Your company signed a forward contract in the past to invest in certain foreign currency (FC)....

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Your company signed a forward contract in the past to invest in certain foreign currency (FC). Today, t = 0, you are interested in knowing the market value of your outstanding forward contract. Your outstanding forward contract expires in 3 month and, under your forward contract, the value of the foreign currency in 3 months will be 1.70 units of your home currency (HC). Finally, assume that the per annum (p.a.) interest rate for 3-month deposits in your home country and the foreign country are 8% and 11%, respectively. REQUIRED: i. Assume that your forward contract is to buy the FC at maturity. Discuss how you can compute the market value of an outstanding forward contract that buys one unit of FC. Then, compute and report the market value of the forward contract under each of the following scenarios for the forward rate today. Approximate your solution to 3 decimal places. [10 marks] Scenarios $1 S2 $3 Forward rates today 1.2 1.3 1.4 S8 S4 S5 S6 S7 1.5 1.6 1.7 1.8 1.9 iv. $10 2 2.1 S9 ii. Assume that your forward contract is to sell the FC at maturity. Then, compute and report the market value of the forward contract under the scenarios considered in the previous part for the forward rate today. Approximate your solution to 3 decimal places. [5 marks] Describe how you can hedge currency risk using the extreme bin method for forward contracts. In addition, discuss the type of risks one can face when hedging with forward contracts certain amount of FC using the extreme bin method. [5 marks] Describe the strategy one can adopt to speculate on the future value of a forward contract. [5 marks] Your company signed a forward contract in the past to invest in certain foreign currency (FC). Today, t = 0, you are interested in knowing the market value of your outstanding forward contract. Your outstanding forward contract expires in 3 month and, under your forward contract, the value of the foreign currency in 3 months will be 1.70 units of your home currency (HC). Finally, assume that the per annum (p.a.) interest rate for 3-month deposits in your home country and the foreign country are 8% and 11%, respectively. REQUIRED: i. Assume that your forward contract is to buy the FC at maturity. Discuss how you can compute the market value of an outstanding forward contract that buys one unit of FC. Then, compute and report the market value of the forward contract under each of the following scenarios for the forward rate today. Approximate your solution to 3 decimal places. [10 marks] Scenarios $1 S2 $3 Forward rates today 1.2 1.3 1.4 S8 S4 S5 S6 S7 1.5 1.6 1.7 1.8 1.9 iv. $10 2 2.1 S9 ii. Assume that your forward contract is to sell the FC at maturity. Then, compute and report the market value of the forward contract under the scenarios considered in the previous part for the forward rate today. Approximate your solution to 3 decimal places. [5 marks] Describe how you can hedge currency risk using the extreme bin method for forward contracts. In addition, discuss the type of risks one can face when hedging with forward contracts certain amount of FC using the extreme bin method. [5 marks] Describe the strategy one can adopt to speculate on the future value of a forward contract. [5 marks]

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SOLUTION i To compute the market value of an outstanding forward contract that buys one unit of FC we need to calculate the difference between the spot rate current exchange rate and the forward rate ... View the full answer