Suppose that a speculator notes that the current three-months forward rate on the euro is $1.36 and the speculator expects that, in three months, the euro will have a value of $1.40. In this situation, the speculator would __________ euros on the forward market, and this activity __________ for the speculator.

Question

Quizplus · Accepted Answer

The speculator believes that the euro will appreciate in value, so they want to buy euros at the current forward rate of $1.36, in order to sell them later for $1.40. This involves risk because if the euro does not appreciate as expected, the speculator could incur losses. Option B, buying with no possible risk, is not accurate as there is always some degree of risk involved in any investment activity. Options C and D involve selling euros, which is not the action the speculator wants to take based on their expectation of appreciation.

Suppose That a Speculator Notes That the Current Three-Months Forward