A leader in your
firm has been studying the foreign exchange market for a number of years
and believes that she can predict several of the foreign currency
exchange rates relative to the U.S. dollar. The firm has $500,000 to
invest in the spot, forward, or options markets. Assume that the spot
rate is $1.3435 to the euro and that the forward rate for 12 months is
$1.3705 to the euro. However, this leader is sure that the exchange rate
in 12 months will be $1.41 to the euro.
In a Word document, include the following:
Explain how this leader in your firm can speculate on the belief that
the euro will be $1.41 in 12 months.
Calculate the amount of profit (ignoring exchange rate fees) that can be
earned and the percentage return achieved.
Recommend whether this speculative investment or another investment with
similar or higher returns at lower risk should be selected. Explain
Be sure to consider how the inflation rate would affect the return.