A dealer buys EUR5,000,000 forward for Euro for delivery in, two months at EUR0.5556/USD and simultaneously sells $EUR,000,000 forward for delivery in three months at EUR0.5545/USD. This foreign exchange transaction is equivalent to

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BlackTom AI · Accepted Answer

First, restate the scenario to ensure we understand the positions involved. The dealer buys EUR5,000,000 forward for Euro for delivery in two months at EUR0.5556/USD and simultaneously sells EUR5,000,000 forward for delivery in three months at EUR0.5545/USD. The question asks which foreign exchange transaction this combination is equivalent to, expressed in USD per EUR terms for the two forwards.

Option a says: selling three-months Euro forward at USD0.5556/EUR and buying two-months Euro forward at USD1.8034/EUR. This mixes a forward price for EUR in terms of USD but uses the wrong direction for the two-month leg and mismatches the given two quoted rates (0.5556 and 0.5545) with 1.8034; moreover, 0.5556 and 1.8034 are not consistent units. In essence, this option treats the two-month leg as a sale and postpones the USD pricing in a way that does not align with the provided positions.

Option b says: selling two-months Euro forward at USD1.7999/EUR and buying three-months Euro forward at USD1.8034/EUR. Here, the USD per EUR rates are 1.7999 and 1.8034, which are in the same ballpark, but we need to check whether the forward directions correspond to the original trades: the dealer sells EUR forward for delivery in three months (i.e., a EUR-forward sale for three months) and buys EUR forward for delivery in two months. In a standard FX forward synthesis, combining a buy of EUR forward two months (against USD) with a sell of EUR forward three months (against USD) would typically map to buying the nearer contract and selling the farther contract in USD terms. However, the exact USD per EUR values should align with the listed quotes in the problem, and this option pairs the two-month buy at 1.7999 with the three-month sell at 1.8034; while this resembles the correct directional structure (long near, short far), the specific USD/EUR levels must match the provided forward quotes when decomposed. Overall, this option matches the general concept but may not reflect the precise decomposition implied by the given EUR0.5556/USD and EUR0.5545/USD quotes.

Option c says: buying three-months Euro forward at USD1.7999/EUR and selling two-months Euro forward at USD0.5545/EUR. Here, the units are inconsistent: USD1.7999/EUR is a plausible USD per EUR price, but USD0.5545/EUR is not in the same scale (it would be USD per EUR in a different quote convention) and it inverts the quotes, which does not reflect the two original forward positions (two-month buy and three-month sell). This option appears to mix the tenor order and price conventions in a way that cannot reproduce the given two-leg position.

Option d says: buying two-months Euro forward at USD1.7999/EUR and selling three-months Euro forward at USD1.8034/EUR. This option keeps the two-month leg as a buy of EUR forward (aligning with the long EUR forward in two months) and the three-month leg as a sale of EUR forward (aligning with the short EUR forward in three months). The USD per EUR prices 1.7999 and 1.8034 are consistent with a near-term long and a longer-term short when expressed in USD per EUR, and they directly reflect the pairing of a two-month buy and a three-month sell in the original description. Conceptually, this arrangement mirrors the structure of a forward swap or a synthetic position that replicates the two separate forward commitments by tenor and direction.

Across all options, the key points to evaluate are: (1) the direction of each forward leg (buy or sell) must match the original positions, i.e., a two-month buy and a three-month sell of EUR forward; (2) the USD per EUR price levels should correspond to the quoted forward rates when expressed for the same tenor; (3) the tenor alignment must reflect delivery in two months for one leg and in three months for the other. Options that invert the tenor, switch buy/sell improperly, or mix inconsistent quote conventions fail to reproduce the given transaction structure.

In summary, the reasoning reveals that only the combination described in the fourth option maintains both the correct tenor pairing (two months and three months) and the correct directional exposure (buy near, sell far) with corresponding USD per EUR pricing that aligns with the provided quotes.

BFC3240 - S2 2025 Mock Exam

A dealer buys EUR5,000,000 forward for Euro for delivery in, two months at EUR0.5556/USD and simultaneously sells $EUR,000,000 forward for delivery in three months at EUR0.5545/USD. This foreign exchange transaction is equivalent to

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