Question Details

How can a forward contract backfire


1. Effects of a Forward Contract. How can a forward contract backfire?

2. Price Movements of Currency Futures. Assume that on November 1, the spot rate of the British
pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound
depreciated during November so that by November 30 it was worth $1.51.
a. What do you think happened to the futures price over the month of November? Why?
b. If you had known that this would occur, would you have purchased or sold a December
futures contract in pounds on November 1? Explain.



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