Explanation:
D is correct. The value of the contract for the bank at expiration:
GBP 80,000,000 * 1.13 EUR/GBP = EUR 90,400,000.
The cost to close out the contract for the bank at expiration:
GBP 80,000,000 * 1.12 EUR/GBP = EUR 89,600,000.
Therefore, the final payoff in EUR to the bank can be calculated as:
90,400,000 − 89,600,000 = EUR 800,000 or 80,000,000 * (1.13 − 1.12) = EUR 800,000.
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An Italian bank enters into a 6-month forward contract with an importer to sell GBP 80 million in 6 months at a rate of EUR 1.13 per GBP 1. In 6 months the exchange rate is EUR 1.12 per GBP 1. What is the payoff to the bank from the forward contract?
A
EUR −800,000
B
EUR −400,000
C
EUR 400,000
D
EUR 800,000
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