The current spot exchange rate is $1.55/£ and the three-month forward rate is $1

Question

The current spot exchange rate is $1.55/£ and the three-month forward rate is $1.50/£. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/£ 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?

Question 31 options: Sell £1,000,000 forward for $1.50/£.

Buy £1,000,000 forward for $1.50/£.

Wait three months, if your forecast is correct buy £1,000,000 at $1.52/£

Sell £1,000,000 today at $1.55/£; wait three months, if your forecast is correct buy £1,000,000 back at $1.52/£

Explanation / Answer

Current Spot rate = $1.55 per pound

3 month futures rate = $1.50 per pound

Expected spot rate after 3 month = $1.52 per pound

Since after 3 month spot rate is greater than Futures rate so the investor should take long position that is buy £1,000,000 in futures contract.

Hence, option (B), “Buy £1,000,000 forward for $1.50/£.” Is correct answer.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.