Question

Assume that interest rate parity exists. The spot rate of the Argentine peso is $0.42. The one-year interest rate in the United States is 7 percent versus 12 percent in Argentina. Assume the futures price is equal to the forward rate. An investor purchased futures contracts on Argentine pesos, representing a total of 1,000,000 pesos. Determine the total dollar amount of profit or loss from this futures contract based on the expectation that the Argentine peso will be worth $0.46 in one year. Use a minus sign to enter a loss, if any. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

$58,750

Step-by-step explanation:

Calculation to Determine the total dollar amount of profit or loss from this futures contract

First step is to find the Forward premium

Forward premium = (1 + .07)/ (1 + .12) -1

Forward premium= -.04464

Second step is to find the Forward rate

Forward rate = $.42 x (1 - .044640)

Forward rate=$.42×0.95536

Forward rate= $.40125

Last step is to find the profit

Profit = ($.46 - $.40125) × 1,000,000

Profit=0.05875× 1,000,000

Profit = $58,750

Therefore the total dollar amount of profit from this futures contract will be $58,750