Question

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. If the spot rate by November 30 was $1.51, should you have purchased or sold a December futures contract in pounds on November 1?

Answer 1

Answer

We should sold futures at the existing futures price of $1.59. Then as the spot rate of the pound declined, the futures price would decline and we can close out our futures position by purchasing a futures contract at a lower price.

Or, we can wait until the settlement date and purchase the pounds in the spot market, and fulfill the futures obligation by delivering pounds at the price of $1.59 per pound.