Explanations please

Problem 7.5 Blade Capital (A) Christoph Hoffeman trades currency for Blade Capital of Geneva. Christoph has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/, while the 30-day forward rate is $1.3350/. a. If Christoph believes the euro will continue to rise in value against the U.S. dollar, so that he expects the spot rate to be $1.3600/ at the end of 30 days, what should he do? b. If Christoph believes the euro will depreciate in value against the U.S. dollar, so that he expects the spot rate to be $1.2800/ at the end of 30 days, what should he do? Assumptions Initial investment (funds available) Current spot rate (US$/) 30-day forward rate (US$/) Expected spot rate in 30 days (US$/) a. Values $10,000,000 $1.3358 $1.3350 $1.3600 b. Values $10,000,000 $1.3358 $1.3350 $1.2800 Strategy for Parta): One of the more interesting dimensions of speculating in the forward market, is that if the speculator has access to the forward market (bank lines or relationships when working on behalf of an established firm), many forward speculation strategies require no actual cash flow position up-front. In this case, Christoph believes the dollar will be trading at $1.36/ in the open market at the end of 30 days, but he has the ability to buy or sell dollars at a forward rate of $1.3350/. He should therefore buy euros forward 30 days (requires no actual cash flow up-front), and at the end of 30 days take delivery of those euros and sell in the spot market at the higher dollar rate for profit. Initial investment principle 30 day forward rate (US$/) Euros bought forward (Investment/ forward rate) Spot rate in open market at end of 30 days (US$/6) USS proceeds (euros bought forward exchanged to USS spot) Profit in US$ $10,000,000.00 $1.3350 7,490,636.70 $1.3600 $10,187,265.92 $187,265.92 Strategy for Part b): Again, a profitable strategy can be executed without any actual cash flow changing hands at the beginning of the period. Since Christoph believes that the dollar will strengthen to $1.28 in 30 days, he should sell euros forward now at the higher dollar rate, wait 30 days and buy the euros needed on the open market at $1.28, and immediately then use those euros to fulfill his forward contract to sell euros for dollars at $1.3350. For a profit. Investment funds needed in 30 days Spot rate in open market at end of 30 days Euros bought in open market in 30 days (Investment/spot rate) $10,000,000.00 $1.2800 7,812,500.00 Stefan had sold these euros forward at the start of the 30 day period. 30 day forward rate (USS/) US$ proceeds (euros sold forward into USS) Profit in US$ $1.3350 $10,429,687.50 $429,687.50