Economics_Ch16

# Therefore i will enter into a contract with bill

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Unformatted text preview: for a Toyota priced at 2.5 million yen, he would have to pay \$45,000. What can Bill do? He could purchase a futures contract today for the needed quantity of yen in August. Who is willing to sell this contract? Obviously someone who thinks the dollar price of yen will go down between now and August. For example, Julie may think to herself, “I think the dollar price of yen will go down between now and August. Therefore, I will enter into a contract with Bill stating that I will give him 2.5 million yen in August for \$30,000, the exchange rate specified in the contract being 1 yen = \$0.012. If I am right, and the actual exchange rate at the time is 1 yen = \$0.011, then I can purchase the 2.5 million yen for \$27,500, and fulfill my contract with Bill by turning the yen over to him for \$30,000. I walk away with \$2,500 profit.” Suppose you check the dollar price of a euro today and find that it is 83 cents. In other words, for every 83 cents, you get 1 euro in return. Let’s say that you believe that in three months you will have to pay \$1.10 to buy a euro. With this belief in mind, you enter into a futures contract: essentially, EXAMPLE: Thousands of people work in the financial industry helping people trade almost anything they want to trade— stocks, bonds, wheat, gold, or money, for example. Do you think you would enjoy this type of work? 452 Chapter 16 Stocks and Bonds you say that you are willing to buy \$10 million worth of euros three months from now for 83 cents a euro. Who might be willing to enter into this contract with you? Anyone who thinks the dollar price of a euro will be lower (not higher) in three months. Suppose you and this other person enter a contract. You promise to buy \$10 million worth of euros in three months (at 83 cents a euro) and this other person promises to sell you \$10 million worth of euros in three months (at 83 cents a euro). Three months pass and we learn that it takes 97 cents to buy a euro (not 83 cents and not \$1.10). What happens now? The person who entered into a contract...
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## This document was uploaded on 01/16/2014.

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