Question

Judy is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Judy thinks the yen will move to ¥128.00/$ in the next six months. If Judy's expectations are correct, then she could profit in the forward market by ________ and then ________.

Select one:

a. She could not profit in the forward market.

b. There is not enough information to answer this question.

c. buying yen for ¥128.53/$; selling yen at ¥128.00/$

d. buying yen for ¥128.00/$; selling yen at ¥128.53/$

Answer 1

Current spot price for japanese yen , P0 = ¥129.87/$

this means : 1$ is currently = ¥129.87

6-month forward rate , P6 = ¥128.53/$

this means, with the forward contract the price will be locked in at P6

1$ =  ¥128.53

Spor rate after 6 months, S6 =  ¥128.00/$

this means 1$ =  ¥128.00

Notice that in the above 3 cases, the value of a dollar (in terms of yen ) decreases continuously, this means that the value of Japanese yen (relative to dollar ) is increasing

since the price of Japanese yen is expected to increase in 6 months, judy would like to buy it today for a lower price and then sell it at a higher price in 6 months to make a profit.

.This will be possible when she would buy yen at ¥128.53/$ by entering into the forward contract and then selling yen in the market after 6 months at ¥128.00/$.

.Hence , correct option is c.