Question

Judy is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market....

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/\$

She could profit in the forward market by buying yen for ¥128.53/\$ and then selling yen at ¥128.00/\$. At ¥128.53/\$, she can buy ¥128.53 for \$1. Now, when she sells those yen she would get a rate of ¥128 for \$1 which means she has to shell out ¥128 for \$1 whereas she bought ¥128.53 for \$1.

Lets say she has \$1000 to invest.

She buys yen @¥128.53 and gets = ¥128.53 x 1000 = ¥128,530

Now, she sells these yen @ ¥128 to get \$1 -

Amount received = ¥128,530 / ¥128/ \$1 = \$1004.14

\$ profit = \$1004.14 - \$1000 = \$4.14

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