Question
You are observing exchange rates provided by your bank. The current spot exchange rate is $1.975 per pound and the three-month forward rate is $1.925
You are observing exchange rates provided by your bank. The current spot exchange rate is $1.975 per pound and the three-month forward rate is $1.925 per pound. On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.945 per pound in three months. Assume that you would like to buy or sell 1,005,000.
Required:
a-1. What actions do you need to take to speculate in the forward market?
a-2. What is the expected dollar profit from speculation?
b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.885 per pound in three months?
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