Assignment Problem 1 (speculation) Suppose the current exchange for Euros is $1.48/ and the 6-month forward rate is $1.52/. A speculator believes that Euro will depreciate against the dollar over the next 6 months and he is willing to take a forward position on 100,000 based on his belief Required a) What forward position would the speculator take? b) What profit or loss would result from the position taken if the spot rate at the end of 6 months turns out to be: i) $1.50/ ii) $1.557 C) Another speculator believes that Euro will appreciate against the dollar over the next 6 months. Would he be engaged in a zero-sum payoffs game based on his diametrically opposite belief about the direction of the movement of the $- exchange rate over the next 6 months? d) Was the current spot exchange rate of $1.48/ used in your calculations? Why or why not? Problem 2 (Hedging) Today, the 6-month forward $- exchange rate is $2.50/ . Suppose a U.S importer knows that she will be paying 100,000 to a German exporter at the end of 6 months from today. She recognizes that Euro could in future move either way: that is, rise (appreciate) or fall (depreciate) against the dollar and does not want to bet on the direction of movement of the Euro against the dollar. She wants to entirely remove the exchange rate variance. She wants to know today the exact dollar amount she will pay for 100, 000 at the end of 6 months from today, by taking an appropriate forward position. Use the information in Problem 1 to answer the following questions: Required a) What forward position should she take to entirely neutralize (remove) the exchange rate risk of meeting her payment obligation at the end of 6 months? b) What dollar payment will she pay for 100,000 at the end of 6 months from today with the forward position taken in part (a) above? c) No upfront cost (or fee) is paid to enter a forward contract. Does this mean that hedging against the exchange rate risk would be cost-free? If not, what was the nature of the cost of hedging