Assume that interest rates are zero and the spot rate in the forex market is £1 = $1. If a speculator expects the spot rate at the end of three months to be £1 = $1.25, then which of the following will allow him to make a proﬁt?

Question

Quizplus · Accepted Answer

If the speculator expects the spot rate to move from £1 = $1 to £1 = $1.25, converting dollars to pounds now and then back to dollars later at the higher rate will yield a profit. This is exactly what option C describes: taking a loan in dollars, converting to pounds, and then converting back to dollars at the anticipated higher rate before repaying the loan.

Assume That Interest Rates Are Zero and the Spot Rate