If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

Question

Quizplus · Accepted Answer

If the Fed intervenes by exchanging euros for U.S. dollars, the value of the euro will increase relative to the U.S. dollar. Therefore, a speculator who expects this intervention would want to purchase euro put options, which give the holder the right to sell euros at a fixed price in the future. This would allow the speculator to profit from the expected increase in the value of the euro.

If a Speculator Expects That the Fed Will Intervene by Exchanging