You are a Japan-based investor who is confident that the spot exchange rate will be ¥110/$ in six months. The six-month
Posted: Wed Mar 09, 2022 8:40 am
You are a Japan-based investor who is confident that the spot
exchange rate will be ¥110/$ in six months. The six-month forward
exchange rate is ¥115/$.
(a) Would you rather buy or sell US$1,000,000 forward? What is
the expected profit in ¥ from your speculation?
(b) What would be your speculative profit/loss in ¥ if the spot
exchange rate turns out to be ¥120/$ in six months?
(c) Draw a payoff profile for your investment. Label on the
graph the exchange rates of ¥120/$, ¥115/$, ¥110/$, and your total
profit or loss associated with each of these exchange rates. Please
also label the axes of the graph.
exchange rate will be ¥110/$ in six months. The six-month forward
exchange rate is ¥115/$.
(a) Would you rather buy or sell US$1,000,000 forward? What is
the expected profit in ¥ from your speculation?
(b) What would be your speculative profit/loss in ¥ if the spot
exchange rate turns out to be ¥120/$ in six months?
(c) Draw a payoff profile for your investment. Label on the
graph the exchange rates of ¥120/$, ¥115/$, ¥110/$, and your total
profit or loss associated with each of these exchange rates. Please
also label the axes of the graph.