Jasper Pernik 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/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price her potential gain is ________ and her potential loss is ________.
A) $100,000; unlimited
B) unlimited; unlimited
C) $100,000; $100,000
D) unlimited; $100,000

Question

Quizplus · Accepted Answer

If Jasper buys $100,000 worth of yen at today's spot price (¥129.87/$), he will receive 12,987,000 yen. If the yen moves to ¥128.00/$ in the next six months (as Jasper thinks), he can sell the 12,987,000 yen for $101,445 (($12,987,000/¥128 per $1) x $1)). 
So Jasper's potential gain is $1,445 ($101,445 - $100,000). However, if the yen appreciates and the exchange rate moves to, say, ¥135/$, Jasper will suffer a loss. In this case, he can sell the 12,987,000 yen for only $96,555 (($12,987,000/¥135 per $1) x $1)). So her potential loss is $3,445 ($100,000 - $96,555). However, there is no limit to how much he can lose if the yen appreciates beyond ¥135/$. Hence, option D is the correct answer.

Jasper Pernik Is a Currency Speculator Who Enjoys "Betting" on Changes