The three-month futures price for the British pound is $1.3160/₤. You expect the spot price three months from today to be $1.2690/₤. The British pound futures contract size is ₤62,500.

1. If you are a speculator would you buy the futures contracts or short (sell) them? Explain.
2. How much profit would you make if you trade 62 contracts and your expectations come true?
3. If you were an MNC with A/R (accounts receivables) of ₤24 million due in three months that you want to hedge, would you buy or sell the pound futures? Explain.
4. How many contracts would you be able to buy or sell? How much would be your pound A/R worth in dollars?

Answer rating: 100% (QA)

a If I am a speculator I am expecting the spot price to be less as compared to the future... View the full answer