Dee is an American speculator, who currently has capital (her total wealth) to

the amount of USD$200,000. Suppose in February 2020, the spot rate for

pound sterling (GBP) is EFeb=GBP/USD=1.23841 ( ). She thinks there

is a good chance that GBP will appreciate in the next four months, and she

builds up a long GBP position worth 100,000, by buying a GBP futures with a

price of F=1.22000, with settlement date at the end of June 2020.

(a) Suppose Dee holds this future until settlement date and finds that the spot

price in June has become EJun=1.18252. If we ignore transaction costs, how

much wealth will she have, in US dollar terms, after settling this contract?

(10 marks)

Suppose instead in April 2020, Dee reads about new developments in the

financial markets and changes her mind. She now thinks GBP will depreciate

instead and her long GBP position will likely lose money. She hedges by going

short 100,000 on GBP to close her net position with settlement date in June

2020. Unfortunately, at this time, she can only find GBP futures with price

F=1.20000.

(b) Given Dee holds these two contracts, ignoring transaction costs, how much

wealth will she have (in US dollar terms) after settling these two contracts?

Has her hedge been successful?

Answer rating: 100% (QA)

To solve this problem we need to calculate Dees profit or loss from the GBP futures contra... View the full answer