A foreign exchange trader assesses the euro exchange rate three months hence as follows:

a. Will the trader buy or sell euros forward against the dollar if she is concerned solely with expected values? In what volume?

b. In reality, what is likely to limit the trader's speculative activities?

c. Suppose the trader revises her probability assessment as follows:

Assuming the forward rate remains at $1.32, do you think this new assessment will affect the trader's decision?

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$1.31 with probability 0.25 0.50 $1.33 with probability $1.35 with probability 0.25 The 90-day forward rate is $1.32.