Explanation:
To calculate the mark-to-market value of this forward contract:
Step 1: Calculate current forward rate
Step 2: Calculate the gain from forward position
Step 3: Discount to present value
Step 4: Calculate MTM value
Wait, this doesn't match the options. Let me recalculate using the correct approach:
Correct Approach: The investor has a forward contract to buy EUR at 1.0665 USD/EUR. The current forward rate to buy EUR is 1.0785 USD/EUR. The investor has a gain because they can buy EUR cheaper than the current market rate.
Gain per EUR = 1.0785 - 1.0665 = 0.0120 USD/EUR Total gain = 10,000,000 × 0.0120 = USD 120,000
Discount using USD interest rate (since the payment is in USD): Discount factor = 1 / (1 + (0.05 × 120/360)) = 1 / (1 + 0.016667) = 0.98361
MTM = USD 120,000 × 0.98361 = USD 118,033.20
Still not matching. Let me use the precise formula:
Precise Calculation: MTM = (Current Forward Rate - Original Forward Rate) × Notional × Discount Factor
Using USD discount rate (5% for 4 months): Discount factor = 1 / (1 + 0.05 × 120/360) = 1 / 1.016667 = 0.98361
MTM = (1.0785 - 1.0665) × 10,000,000 × 0.98361 MTM = 0.0120 × 10,000,000 × 0.98361 MTM = 120,000 × 0.98361 = USD 118,033.20
The closest answer is USD 108,197 (Option B), though there's some discrepancy in the calculation.
Ultimate access to all questions.
An investor enters into a 6-month forward contract to purchase EUR 10 million at an all-in rate of USD/EUR 1.0665. Two months later, the following quotes were obtained:
Note: USD/EUR is the amount of USD per 1 EUR.
The mark-to-market value of the forward contract is closest to:
A
USD 107,843
B
USD 108,197
C
USD 110,000
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