Soledad McArthur is the chief currency trader at the Magna Carta macro hedge fund. She decides on January 15 to go long by buying Mexican peso (MXN) March and June futures currently trading at US$0.11953 and US$0.11790.

a. What does it mean to go long with an MXN futures contract? What is Soledad’s implied exchange rate scenario?

b. Assuming that the initial margin is set at 12. 5 percent of the face value of the contract, what is the amount that Soledad has to deposit in the margin account (each contract has a face value of MXN 500,000)?

c. If Soledad held the March futures to maturity and the spot exchange rate on that day was US$0.11878 = MXN 1, what would be the cash gain/loss incurred by Magna Carta? Assume that the margin account remains constant during the March futures holding period and that Magna Carta’s opportunity cost of capital is 10 percent.

d. On January 16, the inflation forecast released by Mexican authorities points to an upward acceleration of price movements. March and June MXN futures plummet by 4 and 6 percent, respectively. Should Soledad expect a margin call from the futures exchange? Explain what it would mean for Magna Carta.