1. Speculative forward positions: one can buy (a long position) or sell (a short position) foreign exchange by contracting with a bank to buy or sell a specific sum of a currency for delivery on a future date based on his/her expectation that the currency will appreciate or depreciate in the future.

Suppose a CHF/USD trader has just heard an economic forecast from his banks head economist that causes him to believe that the dollar will likely appreciate in value against the Swiss franc over the next three months to 1.0010 CHF/USD. If the current 3-month forward rate (assume no difference between bid and ask quote) for $5,000,000 is 0.9987 CHF/$, could the trader make a speculative profit if the spot rate for dollar appreciated 1.0010 CHF/$ as predicted after three months? If yes, should he take a long or short position of dollar? Explain how much the trader can profit from the accurate prediction in CHF.

What if the exchange rate turned out to be 0.9089 CHF/USD after three months? Was he able to make a profit by following the research from his banks head economist? If not, how much the loss would be in CHF? Explain your answer.