A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900.
How much will the firm gain or lose on the forward contract?
A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Question

A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900.
 How much will the firm gain or lose on the forward contract?
A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Quizplus · Accepted Answer

The firm locked in a rate of 0.5000 USD/AUD for AUD1 million, which means it agreed to sell AUD1 million for USD500,000 (1,000,000 * 0.5000). At settlement, the spot rate is 0.4900 USD/AUD, meaning the AUD1 million is actually worth USD490,000 in the spot market (1,000,000 * 0.4900). By selling AUD1 million at the agreed rate instead of the spot rate, the firm gains USD10,000 (USD500,000 - USD490,000).

A Firm Sells AUD1 Million, Twelve Months Forward at the USD/AUD