Suppose today is Tuesday, January 18, 2011 . If you enter into a 30-day forward contract to purchase euros, when will you pay your dollars and receive your euros? (Hints: February 18, 2011, is a Friday, and the following Monday is a holiday.)
What will be an ideal response?
To determine the value date of the forward contract, which is the day on which the exchange of currencies happens, one must first find the spot value date. For dollar-euro contracts, the spot value date is two business days in the future. Thus, for a spot contract on Tuesday, January 18, 2011, the exchange of currencies would take place on Thursday, January 20, 2011 . The 30-day forward contract settles on the calendar day in the next month corresponding to the date of spot settlement if that is a legitimate business day. The forward contract would therefore settle on February, 20, 2011 if that is a legitimate business day, but that date is a Sunday. Furthermore, Monday, February 21, 2011, is a holiday, so the settlement of the forward contract would be on Tuesday, February 22, 2011 .
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