Jolyn

In the example, Gemco is the short. Let's say the other company is Company X. Company X wants to buy these 50 million Euros in 3 months, so they are long the contract. Gemco is going to receive payment today for these Euros; they are the short.

Today, the rate is EUR/USD 1.23, giving Gemco a payment of $61.5M
In 3 months, the rate will be EUR/USD 1.25.

The EUR appreciated and the $ depreciated in value. So, in 90 days when the settlement date comes, the short, Gemco, will deliver the 50 million Euros per the contract. Because the x-rate is now 1.25, Gemco must deliver this additional $1M to Company X.

Imagine the situation the other way. If the x-rate had falled to 1.21, Gemco, the short, would receive $1M. They receive this amount because Company X, purchases the EUR from Gemco for a rate of 1.23, the contract rate, but the currency is now trading at 1.21.

I hope I was able to clear it up a little bit.



Edited 1 time(s). Last edit at Monday, August 3, 2009 at 02:39PM by kevin.venanzi.