Chapter_10_Exchange_Rates_and_Foreign_Ex (1)

If the exchange rate in 90 days turns out to be 090

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firm will make zero profits. If the exchange rate in 90 days turns out to be $0.90/€, assuming zero transaction costs, the firm will make (A) a loss of $100,000. (B) a loss of $50,000. (C) a profit of $100,000.
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5. The market currently prices one-year euro futures at $1.20, but you think the dollar will weaken to $1.32 per euro in the next 12 months. As a speculator, you buy these futures and if you are proved right, assuming zero transaction costs, you will realize a (A) 10% profit. (B) 8% profit. (C) 5% profit.
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6. Assume a speculator anticipates that the spot rate of the franc in 3 months will be lower than today’s 3-month forward rate of the franc, $0.50=1 franc. (a) How can this speculator use $1 million to speculate in the forward market? (b) What occurs if the franc’s spot rate in 3 months is $0.40? $0.60? $0.50?
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1. A; 2. B; 3. B; 4. A; 5. A 6. (a) The speculator should buy francs on the spot market in 3 months and sell francs on the forward market today for delivery in 3 months at $0.50=1 franc . (b) If the franc’s spot rate in 3 months is $0.40, the speculator could make a profit of $0.10 on each franc. If the franc’s spot rate in 3 months is $0.60, the speculator would suffer a loss of $.10 on each franc.
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