Answered: Suppose that you observe a 90-day…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 9CQ

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Suppose that you observe a 90-day forward rate of $1.14/€. The current spot rate is $1.13/€, and you expect that the spot rate that will be realized 90 days in the future is $1.12/€. What contract would you make to speculate in the forward market by either buying or selling €10,000,000? What is your expected profit? If the standard deviation of the 90 day rate of appreciation of the euro relative to the dollar is 2%, what range covers 95% of your possible profits or losses?

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