Suppose today's exchange rate is $1.23/. The three-month interest rates on dollars and euros are 6 % and 3 % (both

anual rates), respectively. The three-month forward rate is $1.25. A foreign exchange advisory service has predicted

that the euro will appreciate to $1.27 within three months. Consider 1 million euros.

a. How would you use forward contracts to speculate in the above situation?

b. How would you use money market instruments (borrowing and lending) to speculate?

c. Which alternatives (forward contracts or money market instruments) would you prefer? Why?

d. Can you make profits without risks? If so, explain and calculate how you do that.

2. Suppose today's exchange rate is $1.23/. The three-month interest rates on dollars and euros are 6 % and 3 % (both anual rates), respectively. The three-month forward rate is $1.25. A foreign exchange advisory service has predicted that the euro will appreciate to $1.27 within three months. Consider 1 million euros. a.. How would you use forward contracts to speculate in the above situation? b. How would you use money market instruments (borrowing and lending) to speculate? C. Which alternatives (forward contracts or money market instruments) would you prefer? Why? d. Can you make profits without risks? If so, explain and calculate how you do that