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Finance International - Currency Futures

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Currency futures contracts are traded on organized exchanges. Suppose you sell a contract on Australian dollars in the amount of A$100,000 on the Chicago Mercantile Exchange at $0.7900/A$. Upon maturity of the contract, the futures price is $0.7500/A$.

a. Have you made money or lost money? How much have you made or lost?

b. If you hold your position to maturity, what do you do to settle the contract? How are the gains or losses paid?

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Solution Summary

The solution examines currency and exchange rates.

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a. When you sell the Australian dollar, you expect its value to go down. In this case the value went down from 79US cents to 75 US cents. You have made 4 cents gain per dollar. Thus your profit is:
4 cents * 100,000 = $4000 (USD)

b. There are four ways to close out a futures contract:

Offset is the ...

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