Question
Use the following information to answer the next two questions. A currency trader believes the yen will depreciate relative to the dollar in three months.
Use the following information to answer the next two questions.
A currency trader believes the yen will depreciate relative to the dollar in three months. The current spot rate for yen is $.008/yen and the six month forward rate is $.0085/yen. The currency trader agrees to enter into a three month forward contract with 100 million yen attached. The spot rate is $.0075/yen on the day the forward contract expires.
What is the currency trader's profit/loss (in USD) from his forward contract?
-100,000 | ||||||||||||||
100,000 | ||||||||||||||
-50,000 | ||||||||||||||
50,000
Instead of using the forward contract, suppose the currency trader used the spot market to trade based on his belief. What would have been his profit/loss(in USD) at the end of the three month period?
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