u02a1- Questions and Applications

International Financial Management

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
u02a1 – Questions and Applications 1 u02a1 – Questions and Applications Questions and Applications pp. 142-143 – problem 18 – “Speculation” Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $.092 per peso. How could speculators capitalize on this situation, assuming zero transaction costs? How would such speculative activity affect the difference between the forward contract price and the futures price? Speculators could capitalize on this situation and assume zero transaction costs by purchasing the Mexican peso futures for $.09 per unit and then, at the same time sell the Mexican pesos forward at $.092 per unit. Now, because of the Mexican peso futures position, when the speculators receive the Mexican pesos on the settlement date they must then turn around and sell the Mexican pesos to fulfill their forward contract obligations. By doing so, the speculators will generate a profit of $0.002 per unit. Such speculative activity affects the difference between the forward contract price and the future
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This document was uploaded on 06/16/2011.

Page1 / 4

u02a1- Questions and Applications - u02a1 Questions and...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online