Here are today\'s rates: Current spot exchange rate: 3.2 0 Polish zloty per US d

Question

Here are today's rates:

Current spot exchange rate: 3.2

0 Polish zloty per US dollar

6month forward exchange rate: 3

.24 Polish zloty per US dollar

You expect the spot exchange rate in 6 months to be 3.26 Polish

zloty per US dollar.

Evaluate the validity of the following statement: "Given the in

formation above, you wi

ll profit from a forward

exchange speculative position ba

sed on your expected future spo

t exchange rate, if the actual future spot

exchange rate in 6 months is 3.25 zloty per US dollar." (10 poi

nts)

Explanation / Answer

Answer

Current Spot Rate = 3.20 Polish Zloty / US $

6 Months Forward Rate = 3.24  Polish Zloty / US $

Expected Spot Rate after 6 Month = 3.26  Polish Zloty / US $

Actual Spot Rate after 6 Month = 3.25 Polish Zloty / US $

Solution :

If We expect that the spot rate in future will be high we will take a long position in forward market so in this case we will take long position @ current 6 month Forward Rate at 3.24 Polish Zloty / US $.

Now if actual Spot rate turns out to be 3.25 Polish Zloty / US $ after 6 months that means we have predicted the price movement correctly and in the process we will be able to generate the speculative profit =

3.25-3.24= .01 Polish Zloty / US $ by squaring off our long position taken earlier.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

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