Magdalena assumes a US$ 2,000 short position in a 1-year US forward contract
(F = C$1.0312 per US).If the spot rate in one year is C$1.04 per US what will her profit (loss)?
A)(C$8.80)
B)(C$20.00)
C)C$17.64
D)(C$17.64)

Question

Quizplus · Accepted Answer

To determine the profit or loss, we need to compare the forward rate (locked in at the time Magdalena entered into the contract) with the actual spot rate in one year.

Magdalena entered into a short position (betting on the depreciation of the US dollar) at a forward rate of C$1.0312 per US, so she agreed to sell US dollars at that exchange rate in one year.

If the spot rate in one year is C$1.04 per US, Magdalena could now sell her US dollars for a higher exchange rate than the forward rate she locked in. Her profit would be the difference between the forward rate and the spot rate, multiplied by the amount of US dollars she agreed to sell in the forward contract.

Profit/Loss = (Forward Rate - Spot Rate) x Amount Traded
= (C$1.0312 - C$1.04) x US$2,000
= -C$17.60

Note that the result is negative, indicating that Magdalena lost money on the transaction. To convert to Canadian dollars, we divide by the spot rate:

Loss (in CAD) = -C$17.60 / C$1.04 per US
= -C$16.91

The answer closest to this result is D: (C$17.64). However, this is a slight difference due to rounding, so either D or C could be considered acceptable answers, depending on how you round your calculations.

Magdalena Assumes a US$ 2,000 Short Position in a 1-Year