1) A German firm is importing computers from the US. The payment of 20,000 USD is due in 3 months. You are given the following quotes:

3-month forward EUR/USD

Bid: 1.18 Ask: 1.19

Future spot in 3 months

Bid: 1.16 Ask: 1.17

a) What is the cost of import in EUR if the firm decides to use a forward contract? (5 p.)

b) Would the firm be better off waiting for the future spot? Show your work.

2) Using currency futures

On April 1, a currency trader enters a futures contract to buy the Canadian dollar at USD/CAD= 1.29. The settlement day is June 17. On June 17, the spot rate for USD/CAD= 1.28.

Show how the currency trader could generate a profit from speculation and compute the amount of the gain