Question

# Barry speculates in the foreign currency exchange market. Currently the spot price for the Japanese yen...

Barry speculates in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129/\$ and the 6-month forward rate is ¥128 /\$. Barry believes the yen will become ¥126.00/\$ in the next six months.

To profit as a speculator, Barry should ________ at ________ .

Select one:

a. buy dollars; the forward rate

b. sell yen; the forward rate

c. buy yen; the forward rate

d. buy dollars; spot rate

#### Homework Answers

Answer #1

Answer - To profit as a speculator, Barry should buy yen at forward rate

reason -

Suppose Barry buys Yen at 6 month forward rate of ¥128/\$, let's say he buys Yen for \$100000, so he gets ¥12,800,000 (\$100000 * ¥128)

Now, after 6 months he is expecting the Yen per dollar to be at ¥126/\$, if the expected price sustains, after 6 months the forward contract has to be cancelled by selling Yen.

So at that point he will sell ¥12,800,000 and gets \$101587.30 ( ¥12,800,000 / ¥126 )

So he gets a profit of \$101587.30 - \$100000 = \$1587.30

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