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Case Number Four Part a: One Mark for Each Question Suppose todays exchange rate is $1.55/. The six-month interest rates on dollars and euros are
Case Number Four
Part a: One Mark for Each Question
Suppose todays exchange rate is $1.55/. The six-month interest rates on dollars and euros are 6% and 3%, respectively. The six-month forward rate is $1.5478. A foreign exchange advisory service has predicted that the euro will appreciate to $1.5790 within six months.
- How would you use forward contracts to profit in the above situation?
- How would you use money market instruments (borrowing and lending) to profit?
- Which alternatives (forward contracts or money market instruments) would you prefer? Why?
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