If a foreign exchange speculator expects the spot rate of the dollar nine months from today to be lower than today's forward rate on the dollar for delivery in nine months,she may

Question

Quizplus · Accepted Answer

If the speculator expects the spot rate of the dollar to be lower than the forward rate on the dollar for delivery in nine months, she can sell dollars forward today at the higher forward rate and buy them back in the spot market nine months from today at the lower spot rate, thus making a profit. Option A and B involve buying or selling dollars in the spot market only, which does not take advantage of the expected depreciation in the dollar. Option D involves buying dollars forward today at the higher forward rate and then reselling them in the spot market nine months from today, which would result in a loss if the spot rate is lower than the forward rate at that time.

If a Foreign Exchange Speculator Expects the Spot Rate of the Dollar