Just when I thought I was getting the hang of it… the CFAI throws a curve ball.
My question relates to marking forward contracts to market, but I’m having difficulty determining what side the investor is taking. Especially when the problem is wordy. I’ve tried to make a clear example of this, along with an example. Do you have tricks for memorizing whether or not to use the BID or ASK?
Example:
Spot 1.50 – 2.00 USD / EUR
6mo Foward
2.50 – 3.00 USD / EUR
Example 1) Investor A sold $1,000,000 USD against EUR. If he sold USD to buy EUR, we would use the ASK price, correct? Therefore, the total proceeds after conversion would be €500,000EUR. If you were to mark the market, we would want to unwind our LONG position (EUR) – thus we would want to use the BID to SELL EUR against USD.
Can you confirm that this thinking is correct, or if not, HELP!
Example 2)
Investor A is long 1,000,000 USD. This is the reverse of example 1, correct? Therefore, he sold EUR to buy USD - we would use the BID price to calculate converting EUR to USD and the proceeds would be $666,667. If you were to mark to market, we would want to unwind our short position (EUR) – thus we would use the ASK to buy EUR against USD. Can you confirm that this thinking is correct, or if not, HELP!