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Currency Derivatives and Current Price

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Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so thatby November 30 it was worth $1.51.

a) What do you think happened to the futures price over the month of November? Why?

b) If you had known that this would occur, would you have purchased or sold a December futures contract in pounds on November 1? Explain.

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The expert examines currency derivatives and current prices. This posting provides the solutions to the student's questions.

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a) The December futures price would have decreased, because it reflects expectations of the future spot rate as of the settlement date. If the existing spot rate is $1.51, ...

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