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Business, 15.04.2020 02:05 evanredpath

Assume a speculator anticipates that the spot rate of the franc in three months will be lower than today’s three-month forward rate of the franc, $0.50 = 1 franc. Complete the following sentence explaining how this speculator can use $1 million to speculate in the forward market. The U. S. speculator should francs today for delivery in three months at today’s forward rate of the franc, which equals $0.50. What occurs if the franc’s spot rate in three months is $0.40? In three months, the speculator can purchase francs at $0.40 and sell them for the previously contracted rate of $0.50 per franc, thus profiting $0.10 on each franc. In three months, the speculator must purchase francs at $0.40 and resell them at $0.50 per franc, thus suffering losses of $0.10 on each franc specified in the forward contract. In three months, the speculator must purchase francs at $0.40 and resell them at $0.50 per franc, thus neither profiting nor losing from the transaction.

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