Assume that the spot price for converting pounds into dollars is £1 = $1. A speculator converts £1 million into dollars today and enters into a forward contract to convert the dollars back into pounds after six months. If the spot rate after six months is £1 = $1.25, which of the following statements will be true?

Question

Quizplus · Accepted Answer

The speculator initially converts £1 million into $1 million. After six months, with the spot rate at £1 = $1.25, the $1 million would convert back to £0.8 million, resulting in a loss of £0.2 million.

Assume That the Spot Price for Converting Pounds into Dollars