Forward gain or loss

CFA Level III Derivatives
#1

CFA Mock 2011 Q13

I have to receive £ 5million

Expiration is in 3 months

Long because I am receiving £ at future point in time, hence I have to short the futures

In summary I am long on the underlying and short on the futures contract

In futures contract I deliver £ and receive CAD

The other details are given below

S0=CAD1.80/£

S1=CAD1.70/£

For the spot market

I interpret that the above rates that CAD has appreciated ad £ has depreciated.

So what I have to sell in spot £ has depreciated so I loose or in other words what I have to buy CAD has appreciated, hence I loose.

In the forward market

I am short to deliver £

So what I have to deliver in forward £ has depreciated so I gain or in other words what I have to buy CAD has appreciated, hence I gain.

F0=CAD1.75/£

F1=CAD1.65/£

Can anyone please help me confirm my thinking is correct.

Thank you

#2

no need of trying to do so much.

Gain/Loss on Long contract = + Notional * (Forward rate at expiry - Forward Rate at Start)

Gain / Loss on Short Contract = - Notional * (Forward rate at expiry - Forward Rate at Start)

#3

Thank you that is helpful,

But Is my understanding of the flow and identification of long and short correct?

#4

Hey cpk - can you please explain this a little? I get why gain/loss could be (forward rate at start - spot rate at expiry)*notional, but a little unclear on what you posted. Could it be (forwrad rate at expiry - forward rate at start)*number of contracts? Thanks

#5

here notional - is the 5 Million pounds the original amount that was hedged.

£ 5million, S0=CAD1.80/£,S1=CAD1.70/£

so for this piece - you are long the contract -> gain/loss = 5 M £ * (1.7 - 1.8) CAD/£ = -0.5 Mill CAD

£ 5million,F0=CAD1.75/£,F1=CAD1.65/£

so for this part: -5 M £ * (1.65 - 1.75) CAD/£ = +0.5 Mill CAD

#6

Thank you,

So the bottom line for me is that I am short on the contract in this example.

#7

TTKDD you’re fine