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A U.S.based speculator entered into a one-year forward contract to buy MXN 16mn. At the time the speculator entered the contract, the one-year forward rate stood at MXN 20.5,485/USD. When the contract expired a year later, the spot rate was MXN 19.5,112/USD. Calculate the profit or loss (in USD) for the speculator.

Tips: In this case, the speculator entered into a contract to BUY Mexican Pesos at a specified rate in the future, i.e. the Forward Rate. On the day the contract expires, the speculator is obligated to buy at that rate, and the bank with whom the speculator signed the contract is obligated to sell to the speculator at that rate. Therefore, the speculator will make a profit if at the time the contract expires the Spot rate is higher than the Forward rate at which the contract was signed. That way the speculator will be able to buy MXN at a rate lower than the market rate at the time and immediately sell it for a profit. Therefore, the speculator profit (in USD) will be: contract amount to buy in MXN x (spot rate in USD/MXN - forward rate in USD/MXN).

Note that in this specific problem the spot rate and the forward rate were given in terms of MXN per USD, so you have to calculate the reciprocal of these rates before using the formula above. The reciprocal of the rate in MXN per USD gives you the rate in USD/MXN.