Assume the current Euro-Dollar exchange rate is 0.9 EUR/USD. Based on your analysis you expect the Euro to depreciate. What is your trading strategy? Discuss. How much would you invest in this strategy?
Answer-
The Euro-Dollar exchange rate is 0.9 EUR/USD.
As the anticipation is that Euro is likely to depreciate one should go short on the currency Euro. By going short on Euro currency and once the Euro depreciates there will be gains on covering the position.
The anticipation of depreciation of Euro would be less than 0.9 Euro / USD ie. 0.91 EUR / USD for example ie. one needs more euros to buy dollars.
The short positions in currency gets benifitted when the currency depreciates however if the currency appreciates one would incur losses and going long on a currency makes gains when the currency appreciates.
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