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Answers to examples

Example 5

Z (a UK company) has sold goods to a Spanish customer for EUR 100,000
and receipt is due in 60 days. The current spot rate for EUR is GBP1/EUR
1.1500 – 1.1300 and the two month forward contract is priced at 0.20-0.10
cdis.

Calculate the amount of GBP that Z will receive under the forward
contract (to the nearest GBP).

Solution

Z will be looking to sell EUR, so the bank is buying. The bank will buy at the
high rate, so the starting point is the spot rate of 1.1500

You need to add a discount so the forward rate = 1.1500 + 0.0020 = 1.1520

GBP receipt = 100,000/1.1520 = 86,805.56

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