The current spot exchange-rate is $1.20/euro. The current 90-day forward exchang

Question

The current spot exchange-rate is $1.20/euro. The current 90-day forward exchange rate is $1.18/euro. You expect the spot rate to be $1.22/euro in 90 days. How would you speculate using a forward contract? If many people speculate in this way, what pressure is placed on the value of the current forward exchange rate?
The current spot exchange-rate is $1.20/euro. The current 90-day forward exchange rate is $1.18/euro. You expect the spot rate to be $1.22/euro in 90 days. How would you speculate using a forward contract? If many people speculate in this way, what pressure is placed on the value of the current forward exchange rate?
The current spot exchange-rate is $1.20/euro. The current 90-day forward exchange rate is $1.18/euro. You expect the spot rate to be $1.22/euro in 90 days. How would you speculate using a forward contract? If many people speculate in this way, what pressure is placed on the value of the current forward exchange rate?

A company must pay liabilities of 3000 and 5000 at the end of years 2 and 4, respectively. The only investments available to the company are the following two zero-coupon bonds: 1. Effective Annual Yield Par 5.5% 6.8% Maturity (years) 1000 100

Explanation / Answer

Question 1.

The current value of the 90-day forward contract is low, profit can be earned as follows:

Enter a 90-day forward contract now to buy Euros at $1.18 per Euro.

After 90 days, sell all acquired Euros at the spot exchange rate of $1.22 per Euro. So, the profit will be $0.04 (1.22-1.18) per Euro transacted.

Question 2

Present value of Zero-coupon bond 1 = 3000 * v^2 where i = 5.5% : = 3,000 * 0.898452 = $2,695.36

Present value of Zero-coupon bond 2 = 5000 * v^4 where i = 6.8% : = 5,000 * 0.768626 = $3,843.13

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