Speculating on the collapse of Argentina’s currency board. Dr. Lawrence Krohn is the New York–based lead currency strategist for Latin American currencies at Standard Bank. On the eve of its long-overdue devaluation (January 10, 2002), the Argentine peso (ARS) could be purchased or sold 90 days forward at ARS 1. 35 for $1. On January 10, 2002, $1 = ARS 1.

a. Is the Argentine peso at a discount or premium to the U.S. dollar? What was the forward premium/discount on Argentine peso forward contracts? Compute the yearly implicit rate of interest on 90 days forward pesos.

b. Assuming that on January 10, 2002, you expected the peso to devalue by 50 percent within days, explain how you could speculate through the forward exchange market. What would be your expected profit? Show how your expected profits would be affected should you be required to put up a margin of 20 percent on your forward purchase (sale) contract (the opportunity cost of speculators’ funds are supposed to be 12. 5 percent annually).

c. Would you speculate differently (from the answer to part b) if you expected the post-devaluation exchange rate to be ARS 1. 25 to $1? Explain.