1. You have the following quotations and expectations for the British pound:

Present spot rate ....................................................................................... $1.3200/

Six-month forward rate.............................................................................. $1.3500/

Six-month call option on pounds at a strike price

of $1.32 and a premium of 4 cents per pound on the

Philadelphia Stock Exchange

Your expectation for the spot rate in six months....................................... $1.3700/

Assume you have $5,000,000 with which to speculate. Ignore transaction cost, taxes, and interest that might be earned on idle cash balances.

1. If your expectations prove correct, what would be your dollar profit from speculating in the spot market?

1. What risks are associated with this operation?
2. How much capital must be committed?

2. If your expectations prove correct, what would your dollar profit from speculating via the forward market?

1. What risks are associated with this operation?
2. How much capital must be committed?

3. If your expectations prove correct, what would be your dollar profit from speculating via the option market?

1. What risks are associated with this operation?
2. How much capital must be committed?