Question

The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.85/£ in three months. Assume that you would like to buy or sell £1,000,000.

1. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
2. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.93/£.

Answer 1