A bank agrees to buy three-month forward €500,000 at $1.14/€ from its client and simultaneously sells three-month €500,000 at $1.16/€ to offset the position. Three months later the Euro appreciates to $1.15/€ and the client declares bankruptcy. The following is true, except
A bank agrees to buy three-month forward €500,000 at $1.14/€ from its client and simultaneously sells three-month €500,000 at $1.16/€ to offset the position. Three months later the Euro appreciates to $1.15/€ and the client declares bankruptcy. The following is true, except
| A |
At the end of three months, the bank will incur a loss of $5,000 compared to the expected gain.
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| B |
At the end of the three month, the bank will incur a gain of $5,000 compared to the expected gain.
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| C |
The current transaction requires the bank In three months to purchase €500,000 in exchange for $570,000.
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| D |
The current transaction requires the bank In three months to sell €500,000 in exchange for $580,000.
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A forward is a type of derivative where the parties are obligated to buy or sell the underlying commodity at expiry.
The formula to determine the value in USD is as follows:
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