Given the following: - (E_{0}=$ 1.50 / mathrm{BP}) - (F_{0}=$ 1.50 /) BP (one-year forward contract) -

Question:

Given the following:
- $E_{0}=\$ 1.50 / \mathrm{BP}$
- $F_{0}=\$ 1.50 /$ BP (one-year forward contract)
- $R_{\mathrm{US}}=2 \%$ (annual)
- $R_{\mathrm{BP}}=2 \%$ (annual)

a. Explain how you would speculate on the BP using the forward market if you expected the spot exchange rate to be $\$ 1.60 / \mathrm{BP}$ one year from now.

b. Explain how you would speculate on the BP using the money market if you expected the spot exchange rate to be $\$ 1.60 / \mathrm{BP}$ one year from now (assume you can borrow and lend at $R_{\mathrm{US}}=R_{\mathrm{BP}}=2 \%$ ).

c. Explain how you would speculate on the BP using the forward market if you expected the spot exchange rate to be $\$ 1.40 / \mathrm{BP}$ one year from now.

d. Explain how you would speculate on the BP using the money market if you expected the spot exchange rate to be $\$ 1.40 / \mathrm{FC}$ one year from now (assume you can borrow and lend at $R_{\mathrm{US}}=R_{\mathrm{BP}}=2 \%$ ).

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