8. Examine the spot rate and the six-month forward rate for the British pound. Suppose a speculator anticipates that the
Posted: Tue Nov 16, 2021 8:30 am
8. Examine the spot rate and the six-month forward rate for the
British pound. Suppose a speculator anticipates that the pound’s
spot rate and the six-month Eurodollar deposit rates will be
unchanged from their present levels in six months time. However, at
that future date, the six-month Euro-sterling deposit rates will
have changed to 10.0000-10.0625% per annum. What should be the
six-month forward rate for the pound if covered interest arbitrage
opportunities are to be avoided half a year from now? How can the
speculator profit from the expected change in the interest rate
difference while remaining in a “square” position (i.e., offsetting
foreign exchange purchase contracts with sales contracts) at all
times? What will be the expected dollar profit per pound? How will
this expected profit change if the spot rate six months later does
not remain constant but changes to 1.5500/10? To 1.4500/10? What
circumstances might cause the speculator to realize a loss rather
than a gain?
Exhibit 1 Spot and Forward Exchange Rates Spot 1 Month 3 Months 6 Months 12 Months Currency Sterlinga 1.4890/00 55/52 160/156 302/289 560/523 Deutsche mark 2.0310/20 22/18 64/54 128/105 277/228 French Franc 6.6575/625 73/86 263/296 505/590 1194/1351 Yen 154.20/30 8/6 33/27 75/62 164/137 SDRA 1.2141/43 5/3 12/8 18/11 24/12 aU.S. dollars per unit of currency.
British pound. Suppose a speculator anticipates that the pound’s
spot rate and the six-month Eurodollar deposit rates will be
unchanged from their present levels in six months time. However, at
that future date, the six-month Euro-sterling deposit rates will
have changed to 10.0000-10.0625% per annum. What should be the
six-month forward rate for the pound if covered interest arbitrage
opportunities are to be avoided half a year from now? How can the
speculator profit from the expected change in the interest rate
difference while remaining in a “square” position (i.e., offsetting
foreign exchange purchase contracts with sales contracts) at all
times? What will be the expected dollar profit per pound? How will
this expected profit change if the spot rate six months later does
not remain constant but changes to 1.5500/10? To 1.4500/10? What
circumstances might cause the speculator to realize a loss rather
than a gain?
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