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# Spot rate, currency contracts

One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is \$1.3225/?. What is the expected spot rate in one year if the international Fisher effect holds?

a. \$1.3315/?

Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/\$ and the 6-month forward rate is ¥128.53/\$. Andrea thinks the yen will move to ¥128.00/\$ in the next six months. If Andrea's expectations are correct, then she could profit in the forward market by __________ and then __________.

b. buying yen for ¥128.53/\$, selling yen at ¥128.00/\$

A U.S. firm sells merchandise to a British company for £100,000 at a current exchange rate of \$1.43/£. If the exchange rate changes to \$1.45/£ the U.S. firm will realize a __________ of __________.

a. loss; \$2000

#### Solution Preview

One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is \$1.3225/?. What is the expected spot rate in one year if the international Fisher effect holds?

a. Spot rate*(1+Interst rate in Euroland)/(1+interest rate in US) = 1.3225*(1+2.6%)/(1+3.3%)
=\$1.3314/?

Andrea Cujoli is a currency speculator who enjoys "betting" on changes ...

#### Solution Summary

Answers explained for you (not just computation).

\$2.19