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) a. If Uzair believes the euro will continue to slide in value against the U.S. dollar, and he expects the spot rate to be USD0.800/EUR at the end of 30 days, what should he do?

Answer 1

As Uzair thinks that the spot rate after 30 days will be USD 0.800 /EUR whereas USD is available cheaper at USD 0.900/EUR in the 30 days forward market, UZair must sell the Euro forward.

1. Convert USD 10 million to Euro at the current rate of USD0.885/EUR to get 10/0.885 = 11.29944 million Euro and then if possible Invest the amount for 30 days. If not , then keep the amount as it is

2. Sell 11.29944 million Euro forward at  USD0.900/EUR rate in the forward market.

3. After 30 days, sell the Euro amount and get 11.29944*0.9 = 10.16949 million USD