Question

Kapinsky Capital Geneva (B). Christoph Hoffeman of Kapinsky Capital believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has

$100 comma 000100,000 to invest. The current spot rate is $0.58220.5822 /SF, the 3-month forward rate is $0.56390.5639 /SF,and he expects the spot rates to reach $0.62530.6253 /SF in three months.

a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.

b. Calculate Christoph's expected profit assuming he buys or sells SF three months forward.

a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.

Christoph's expected profit assuming a pure spot market speculation strategy is $ ?

Answer 1

a)SF bought today : 100000/.5822 = SF171762.2810

Value received in $ in 3 months at future spot rate : 171762.2810 * .6253 = $ 107402.95

Amount profit = Value received in $ in 3 months at future spot rate -Amount invested

               = 107402.95 -100000

                 = $ 7402.95

b)Value received in $ in 3 months at forward rate : 171762.2810 * .5639 = $ 96856.75

Amount of profit= Value received in $ in 3 months at forward rate -Amount invested

                    = 96856.75 - 100000

                  = $ - 3143.25