Question

Don Howard is a trader who likes to make money based on changes in the foreigncurrency exchange market. Currently the spot rate is 24.0239 MXN/USD and the3-month forward rate is 26.5693 MXN/USD. Clint thinks the exchange rate will moveto 25.3487 MXN/USD in the next three months. How can Don profit in the forwardmarket if he wants to trade USD1,000,000

Answer 1

Don Howard can profit in the forward market by entering into a forward contract and taking advantage of a predicted exchange rate movement.

Step-by-step explanation:

To profit in the forward market, Don Howard can enter into a forward contract to sell USD1,000,000 in 3 months at the agreed forward rate of 26.5693 MXN/USD.

If the exchange rate actually moves to 25.3487 MXN/USD as Clint predicts, Don will be able to buy back the USD1,000,000 at the spot rate of 25.3487 MXN/USD, making a profit.

Answer 2

Don profit in the forward market can be USD 48,152.37

Step-by-step explanation:

Spot rate currently is at 24.0239 MXN/USD

Sell USD forward at 26.5693 MXN/USD

Profit on settlement after 3 months = (Selling price - buying price)*Number of units

Profit on settlement after 3 months = (26.5693 - 25.3487)*1,000,000

Profit on settlement after 3 months = MXN 1,220,600

The exchange rate is expected to move to 25.3487 by Clint

Hence, 1,220,600/25.3487 = USD 48,152.37

Don profit in the forward market can be USD 48,152.37 if hewants to trade USD 1,000,000