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

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