A U.S. investor is planning to do some speculation in the foreign exchange market. a] Define speculation. Briefly describe how an investor might use i] futures in foreign exchange and ii] foreign exchange options, to speculate. What are the main benefits each type of contract and how do both compare to forward contracts for the purpose of speculation? b] Suppose the investor chooses to buy a pound futures contract for 62,500, the futures contract price is 2 USD per pound, and the maturity date of the contract is the third Wednesday in June 2016. If the future's price on May 10th, 2016 is 2.1 USD per pound, calculate the profit or loss from liquidating this contract on that date. What is the profit/loss from liquidation if the future's price is 1.9 USD per pound on May 10th 2016? c] Suppose the investor chooses to buy a pound call option for 62,500 with a strike price of 2 USD per pound. The maturity date of the contract is the third Wednesday in June 2016. If the spot rate on May 10th, 2016 is 2.1 USD per pound, do you think the investor should exercise the option on this date? Is the ption is in the money, out of the money or at the money? Calculate the payoff from exercising. Explain why the investor might NOT exercise the option at this date. d] Suppose that the spot rate on the maturity date of the futures contract in b] and the option in c) is 1.9 USD per pound. Draw the value profiles of the future and option on the same diagram and label the diagram carefully, showing what the expiration value of each derivative is. e] Briefly describe what the value of an option's premium reflects and to whom it is paid and when. Would you take account of the premium you had paid in deciding whether or not to exercise an option? Explain