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 would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month U.S. Treasury securities at an annual rate of 2.50%.

Question

Quizplus · Accepted Answer

The forward rate indicates that the yen is expected to depreciate against the dollar. If Jasper buys yen now and sells them in the future at the lower forward rate, this transaction could yield a lower return than the guaranteed 2.50% from U.S. Treasury securities, especially after considering transaction costs and the risk involved in currency speculation.

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