74 the current spot exchange rate is 145 and the

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International Financial Management
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Chapter 8 / Exercise 32
International Financial Management
Madura
Expert Verified
74. The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct? A. Take a short position in a forward. If you're right you will make $15,000. B. Take a long position in a forward contract on euro. If you're right you will make $5,000. C. Take a short position in a forward contract on euro. If you're right you will make $5,000. D. Take a long position in a forward contract on euro. If you're right you will make $15,000. You would agree to sell euro at $1.55; if you can buy them for $1.50 you make $0.05. Do that 100,000 times and you make $5,000. 75. (p. 126) Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00 A. The trader has lost $625. B. The trader has lost $6,250. C. The trader has made $6,250. D. The trader has lost $66,287.88 The trader agreed to buy something worth $1.65 for $1.75. He lost a dime. He lost 62,500 dimes. That many dimes is worth $6,250. See page 126. 76. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? A. Sell €1,000,000 forward for $1.50/€. B. Buy €1,000,000 forward for $1.50/€. C. Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€ D. Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€ if you agree to buy €1,000,000 forward for $1.50/€ and the price is actually turns out to be $1.62/€ in three months, your expected profit will be$12,000 = €1,000,000 × ($1.62 - $1.50) While answer d is tempting from an accounting standpoint, is wrong since the question asks you to make money with a forward contract, not by holding a spot position. 5-59
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International Financial Management
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Chapter 8 / Exercise 32
International Financial Management
Madura
Expert Verified
Chapter 05 The Market for Foreign Exchange 77. The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? A. Sell €1,000,000 forward for $1.50/€. B. Buy €1,000,000 forward for $1.55/€. C. Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€ D. Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€ if you agree to buy €1,000,000 forward for $1.55/€ and the price is actually turns out to be $1.62/€ in three months, your expected profit will be $7,000 = €1,000,000 × ($1.62 - $1.55) While answer d) is tempting from an accounting standpoint, is wrong since the question asks you to make money with a forward contract, not by holding a spot position.

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