Futures contract - determining gain/loss

CFA Level III Derivatives
#1

Sch Exam Practice Book 1 Exam 3 1 Afternoon

Q 41

Q: Assume Bauer hedges the principal by selling £5,000,000 in pound futures at £0.79/€ and the value of the investment £5,100,000. When the hedge is lifted the futures rate is £0.785 /€ and the spot rate is £0.75 /€

The solution is given in the book, so I do not wish to repeat it here. I intend to capture my interpretations here

  1. Bauer is short the contract as he has to deliver the £ on the futures-deliver £ and receive €

  2. The rate has appreciated from £0.79/€ to £0.785 /€

  3. Since I am short and my outflow rate has appreciated, I suffer a loss on the futures contract

Kindly let me know if my understanding is not place/missing anything.

Can someone please help me either refer to any source where the following examples are provided

  1. Gain on a long futures contract

  2. Loss on a long futures contract

  3. Gain on a short futures contract

Thank you

#2

  1. Bauer is actually long the contract as he is buying base currency. Long/short always refers to base currency

  2. The rate has appreciated from £0.79/€ to £0.785 /€ means that Pound has appreciated, Euro deppreciated. Sport rates are different. What you gave us is change in forward rates and one spot rate. We need one more spot rate.

  3. Futeres rate changed against you, so you have a loss on futeres position.