Explore BrainMass

Explore BrainMass

    International Finance

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    15. Suppose today's exchange rate is $0.62/Euro. The 6-month interest rates on dollars and Euro are 6% and 3%, respectively. The 6-month forward rate is $0.6185. A foreign exchange advisory service has predicted that the Euro will appreciate to $0.64 within six months.

    a. How would you use forward contracts to profit in the above situation?

    b. How would you use money market instruments (borrowing and lending) to profit?

    c. Which alternatives (forward contracts or money market instruments) would you prefer? Why?

    © BrainMass Inc. brainmass.com June 3, 2020, 9:17 pm ad1c9bdddf
    https://brainmass.com/business/foreign-exchange-rates/international-finance-175206

    Solution Preview

    a. How would you use forward contracts to profit in the above situation?

    ANSWER. By buying Euro forward for six months and selling it in the spot market, you can lock in an expected profit of $0.0215 (0.64 - 0.6185) per Euro bought forward. This is a semiannual percentage return of ...

    Solution Summary

    This posting provides a detailed solution to the student's question.

    $2.19

    ADVERTISEMENT