dotamasta

revenant Wrote:
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> Shouldn't it be USD/EUR instead?
>
> With the contract, Gemco was disadvantaged because
> he could have netted US$62.5M instead of the
> US$61.5M. I thought he should be the one being
> compensated?
>
> Thanks.


It's EUR/USD. Currency pairs are quoted as one unit of the base currency, in this case it's Euro's, being equivalent to the x-rate in terms of the 2nd currency. You can read it as "1 Euro is worth $1.23."

Gemco entered the contract as a short because they thought that rates would fall in the future. If they fell, then Gemco would have received the payment as in the reverse situation at the end of my last post. If Gemco thought that rates would rise, it would not be in their best interest to enter the contract on the short side as they could receive more in the future without it.

Company X entered the contract long because they thought that rates would rise in the future, as they did. Opposite of the above statement, because rates rose, the long is disadvantaged because the current market rate at settlement is 1.25, while they only paid Gemco based on the 1.23 rate. Because the rates rose in their favor, they are to receive the payment. Once they receive the payment, they are no longer disadvantaged.