The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on...
The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
A) Sell €1,000,000 forward for $1.50/€.
B) Buy €1,000,000 forward for $1.55/€.
C) Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€.
D) Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.
Homework Answers
B) Buy €1,000,000 forward for $1.55/€.
Expected profit=1000000*(1.62-1.55)=70000.00
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