Question

. 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/€, and you expect to gain $120,000. B. Buy €1,000,000 forward for $1.55/€, and you expect to gain $70,000. C. Buy €1,000,000 forward for $1.50/€, and you expect to gain $120,000. D. Wait for three months, if your forecast is correct buy €1,000,000 at $1.62/€.

Answer 1

Answer:

B) Buy €1,000,000 forward for $1.55/€.

Explanation:

To calculate the expected profit consider the following data and formula:

Amount in actions: 1.000.000

Spot exchange rate: 1.62

Three month forward calculation: 1.55

Expected profit=1,000, 000 *( 1.62 - 1.55) = 70,000.00.