Examine the spot rate and the six-month forward rate for the British pound. Suppose a speculator anticipates that the pound’s spot rate and the six-month Eurodollar deposit rates will be unchanged from their present levels in six months time. However, at that future date, the six-month Euro-sterling deposit rates will have changed to 10.0000-10.0625% per annum. What should be the new six-month forward rate for the pound if covered interest arbitrage opportunities are to be avoided half a year from now? How can the speculator profit from the expected change in the interest rate difference while remaining in a “square” position (i.e., offsetting foreign exchange purchase contracts with sales contracts) at all times? What will be the expected dollar profit per pound? How will this expected profit change if the spot rate six months later does not remain constant but changes to 1.5500 /10? To 1.4500 /10? What circumstances might cause the speculator to realize a loss rather than a gain?

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Examine the spot rate and the sixmonth forward rate for the British pound Suppose a speculator anticipates that the pounds spot rate and the sixmonth ... View the full answer