RiverRock Capital Geneva (A).Christoph Hoffeman trades currency for RiverRock Capital of Geneva. Christoph has

USD10

million to begin with, and he must state all profits at the end of any speculation while the 30-day forward rate is

USD1.3349

= EUR1.00.a. If Christoph believes the euro will continue to rise in value against the U.S. dollar and expects the spot rate to be

USD1.3600

= EUR1.00 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 and expects the spot rate to be

USD1.2800

= EUR1.00 at the end of 30 days, what should he do?

Question content area bottom

Part 1

a. If Christoph believes the euro will continue to rise in value against the U.S. dollar and expects the spot rate to be

USD1.3600

= EUR1.00 at the end of 30 days, what should he do? (Select the best choice below.)

A.In this case, Christoph believes the dollar will be trading at

USD1.3600/EUR

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

USD1.3349/EUR.

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.

B.In this case, Christoph believes the dollar will be trading at

USD1.3600/EUR

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

USD1.2800/EUR.

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.

C.In this case, Christoph believes the dollar will be trading at

USD1.3349/EUR

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

USD1.3600/EUR.

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.

D.In this case, Christoph believes the dollar will be trading at

USD1.2800/EUR

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

USD1.3349/EUR.

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.

Part 2

b. If Christoph believes the euro will depreciate in value against the U.S. dollar and expects the spot rate to be

USD1.2800

= EUR1.00 at the end of 30 days, what should he do? (Select the best choice below.)

A.Since Christoph believes that the dollar will strengthen to

USD1.2800/EUR

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

USD1.2800/EUR,

and immediately then use those euros to fulfill his forward contract to sell euros for dollars at

USD1.3349/EUR

for a profit.

B.Since Christoph believes that the dollar will strengthen to

USD1.3349/EUR

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

USD1.2800/EUR,

and immediately then use those euros to fulfill his forward contract to sell euros for dollars at

USD1.3600/EUR

for a profit.

C.Since Christoph believes that the dollar will strengthen to

USD1.2800/EUR

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

USD1.2800/EUR,

and immediately then use those euros to fulfill his forward contract to sell euros for dollars at

USD1.3600/EUR

for a profit.

D.Since Christoph believes that the dollar will strengthen to

USD1.3600/EUR

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

USD1.2800/EUR,

and immediately then use those euros to fulfill his forward contract to sell euros for dollars at

USD1.3349/EUR

for a profit.