Can someone please help me understand how the up the bid down the ask applies in this situation.
Per the Kaplan answer, the relevant rate to use is $1.4621 (60 day bid). I don’t understand why when calculating the mark to market in this situation, you don’t use the ask price of 1.4625. The way I see it (which is seemingly incorrect) is that your are purchasing GBP using USD/GDP pricing. Therefore, you are going down the quote and using the ask price.
As always, any help is appreciated!
An investor has entered into a 90-day forward contract to purchase 2 million GBP at an all-in rate of USD 1.4612. In 30 days, the following quotes were available:
USD/GBP spot rate 1.4522−24 30-day forward rate 1.4618−21 60-day forward rate 1.4621−25 90-day forward rate 1.4632−36
Interest rate information:
Interest rates** When contract was initiated **** Currently (t=30) **** USD **** GBP **** USD **** GBP** 30-day 0.20% 0.32% 0.20% 0.32% 60-day 0.21% 0.32% 0.21% 0.32% 90-day 0.21% 0.33% 0.21% 0.33%
The mark-to-market value of the forward contract is closest to:
“To unwind the forward contract, the investor would enter into a 60-day forward contract to sell GBP. The relevant exchange rate is 1.4621. The value obtained will be in price currency (USD) and would be discounted at USD interest rate for 60 days (at t=30).”
The answer is $1,800 btw.