Hi out to all CFA takers. I have a question on the relationship between Future spot rate and forward rate. Lets assume that we long a EUR/USD forward today. On maturity, the spot rate is higher than the forward rate initiated, may i know is the forward in the money or out of money? I know that when we long EUR/USD, we are having a long position in EUR. But as the spot rate now is larger than the forward rate, wouldn’t it be logical to deduce that EUR has depreciated against USD. Is it a loss for trader having a long position in EUR/USD? Please help! Thanks!
Forwards are not options and hence never in the money or out of the money.
You are bound to exercise the forward regardless of the future spot rates.
Actually, if you’re long EUR/USD, you’re short EUR and long USD: your position is described relative to the base currency, not the price currency.
If the spot rate is larger than the forward rate, you’ll make money: USD will cost you fewer EUR on your contract than in the spot market.
Think of USD as if it were a commodity: oil. If the spot price of oil is EUR70/bbl and your forward price is EUR65/bbl, will you make money or lose money?