FIN$4200$

Forward Contracts Assignment

Last Name: Vlahos

Explain the difference between a long forward and a short forward position.

Explain carefully the differences between hedging, speculation and arbitrage.

A US firm has an obligation on $\frac{11}{21}\frac{?}{2020}$ that requires it pay $1$ M GBP for an import.

a$.$ Outline the strategy to hedge its risk using the following quotations:

$\backslash$table$[[\backslash$table$[[$Spot$/$Forward Rates as of$],[\frac{5}{21}\frac{?}{2020}$ on USD$/$GBP:$],[$Quotes are #USD$/$GBP$]],$Bid,Ask$/$Offer$],[$Spot$,1\mathrm{.}2217,1\mathrm{.}2220],[1$ month forward,$1\mathrm{.}2218,1\mathrm{.}2222],[3$ months forward,$1\mathrm{.}2220,1\mathrm{.}2225],[6$ months forward,$1\mathrm{.}2224,1\mathrm{.}2230]]$

a$.$ How much does the firm gain$/$lose if the exchange rate at the end of the contract is $1\mathrm{.}300$ USD$/$GBP

b$.$ How much does the firm gain$/$lose if the exchange rate at the end of the contract is $1\mathrm{.}200$ USD$/$GBP

$4.$ An investor enters into a short forward contract selling $100,000$ GBP for USD at an exchange rate of $1\mathrm{.}5US\frac{D}{G}BP.$

a$.$ How much does the investor gain$/$lose if the exchange rate at the end of the contract is $1\mathrm{.}4900$ USD$/$GBP

b$.$ How much does the investor gain$/$lose if the exchange rate at the end of the contract is $1\mathrm{.}5200$ USD$/$GBP

$5.$ What is the difference between OTC and exchange$-$traded markets? What are the bid and ask$/$offer quotes of a market maker in these markets?