The current spot exchange rate is $1.70/£ and the three-month forward rate is $1.71/£. You believe...

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Finance

The current spot exchange rate is $1.70/£ and the three-monthforward rate is $1.71/£. You believe that the spot exchange ratewill be $1.69/£ in three months.
(1) What actions do you need to take to speculate in the forwardmarket? What is the expected dollar profit from speculation? Assumethat you would like to buy or sell £1,000,000 forward.
(2) What is your dollar profit if the spot exchange rate turnsout to be $1.79/£ in three months?
(3) Diagram the dollar profit schedule (for the position youtake) against the future spot rate expressed in American terms.

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4.2 Ratings (651 Votes)

Solution1Current three month forward rate 171Expected spot rate after three months 169So we should sell 1000000 forward as wewill See Answer

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The current spot exchange rate is $1.70/£ and the three-monthforward rate is $1.71/£. You believe that the spot exchange ratewill be $1.69/£ in three months.(1) What actions do you need to take to speculate in the forwardmarket? What is the expected dollar profit from speculation? Assumethat you would like to buy or sell £1,000,000 forward.(2) What is your dollar profit if the spot exchange rate turnsout to be $1.79/£ in three months?(3) Diagram the dollar profit schedule (for the position youtake) against the future spot rate expressed in American terms.