Question

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

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