Arbitrage Illustration 17
The spot rate for the French Franc is $ 0.1250 and the three month forward rate is $ 0.1260. Your company is prepared to speculate that the French France will move to $ 0.1400 by the end of three months.
a) Are the quotations given direct or indirect quotations?
b) How could the speculation be undertaken using the spot market only?
c) How would the speculation be arranged using forward markets?
d) If your company were prepared to put $ 1 million at risk on the deal, what would the profit turn out to be if expectations were met? Ignore all interest rate implications.
e) [in chapter 8] (Mumbai University, October 2004)
(Ans.: a) Direct)
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