Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a one-month forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.
A) 0.0338
B) -AUD33 800
C) AUD33 800
D) AUD1.8 million

Question

Quizplus · Accepted Answer

Counterparty A initially agrees to sell USD1 million at a rate of 1.7662 AUD/USD, which would have resulted in receiving AUD1.7662 million. By entering into a second contract to buy USD1 million at a rate of 1.8000 AUD/USD, A needs to pay AUD1.8 million. The net cost is the difference: AUD1.8 million - AUD1.7662 million = AUD0.0338 million, or AUD33,800. The cost is negative for A, indicating a loss, hence -AUD33,800.

Suppose That Two Counterparties, a and B, Enter a Three-Month