Originally posted by: Syringer
A company enters into a forward contract witha bank to sell a foreign currency for K_1 at time T_1. The exchange rate at T_1 proves to be S_1 (> K_1) . The comapny asks the bank if i t can roll the contract forward until T_2 (> T_1) rather than settle at time T1. The bank agrees to a new delivery price K_2. Explain how K_2 should be calculated.
hypothetical:
K_1 = $100 contract price
T_1 = 1 year out
Exchange rate at T_1 = S_1 = 1.00
T_2 = (> 1), so 2?
K_2 = (> $100 contract price)
So, the company buys a $100 contract to sell a foreign currency in 1 year at exchange rate 1.00.
If the company needs an additional year, then obviously the firm will have to pay additional money. I think it would depend on the exchange rate at the time of the rolling of the contract. If the exchange rate was lower, then the company has lost money at settlement, but if the exchange rate was higher, then the company has gained from it. Most likley the company would probably settle if they have profitied from the transaction.
Not exactly sure if your looking for a equation
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