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The current spot exchange rate is 1.85 U.S. dollar per Pound (E$/= 1.85) and the three-month forward rate isF$/= 1.90. Based on your analysis of
- The current spot exchange rate is 1.85 U.S. dollar per Pound (E$/= 1.85) and the three-month forward rate isF$/= 1.90. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will beE$/= 1.93. in three months. Assume that you have1,000,000 available to buy or sell currency.
- (a)What actions can you take to speculate (i.e. "take a bet") in the forward market? What is the expected dollar profit from such speculation?
- (b)What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to beE$/= 1.86 ?
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