Question

Uzair is speculating in the movement of USD and EUR. Uzair has USD10 million to begin
with, and Uzair must state all profits at the end of any speculation in USD. The spot rate on
the euro is USD0.885/EUR, while the 30-days forward rate is USD0.900/EUR.
(Note: State all answer in USD)

Answer 1

Here Uzair is specuating in the movement of UDS and EUR and Uzair has USD10 Million.

To earn profit first of Uzair need to check arbitrage profit by spot rate and 30-days forward rate in this question.

In spot Uzair can buy EURO and sell the EURO in forward contract.

Today,

Uzair buy the EURO and sell the forward contract.

So Euro received = USD 10 Million x Spot rate = USD 10,000,000 x 1/0.885 = EURO 11,299,435.03

and Enter into forward contract to sell EURO after 1-month at rate USD0.900/EUR

After 1-Month

Uzair execute the forward contract and sell the Euro and received Dollor

So Dollor Received = EURO 11,299,435.03 x 0.900 = USD 10,169,491.53

Profit = USD 10,169,491.53 - USD 10,000,000 = USD 169,491.53

Uzair can earn profit of USD 169,491.53 by speculation in the movement of USD and EURO.