Assume that the current spot quote ($/UK pound) is currently $1.80 and that the

Question

Assume that the current spot quote ($/UK pound) is currently $1.80 and that the current 90-day forward quote ($/UK pound) is $2.00. If you believe that the actual spot quote in 90 days will be $1.90, what should be done to make money (assuming that the rate does actually go to $1.90 as you predict). Explain

Assume that the current spot quote ($/UK pound) is currently $1.80 and that the current 90-day forward quote ($/UK pound) is $2.00. If you believe that the actual spot quote ($/UK pound) in 90 days will be $1.90, what should be done to make money (assuming that the rate does actually go to $1.90 as you predict). a. sell pounds forward, buy pounds spot b. sell pounds spot, buy pounds forward c. there is not enough information to give the correct answer

Explanation / Answer

c. Would be the right ans as interest is missing it should be provided to give correct ans

If we sell the pound at cureent spot price then we would invest $ for 90 days and compare the result 90 days forward rate and 90 days current spot price to check profit earned or lost after 90 days.

If we hold pound for 90 days then also we will invest pound for 90 days and buy the forward rate to convert it into $.

So, interest rate is reuired for both the currency $ and pound.

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