Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. If Andrea's expectations are correct, then she could profit in the forward market by ________ and then ________.

Question

Quizplus · Accepted Answer

According to Andrea's expectations, the yen will appreciate in the next six months. This means that the forward rate of ¥128.53/$ will be more expensive than the spot rate of ¥129.87/$. Therefore, Andrea should buy yen at the cheaper spot rate of ¥129.87/$ and sell it in the forward market for ¥128.53/$ to profit from the expected appreciation. This means she would buy yen for ¥129.87/$ and sell yen for ¥128.53/$, which is option B.

Andrea Cujoli Is a Currency Speculator Who Enjoys "Betting" on Changes