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Speculating with Currency Futures

Speculating with Currency Futures: Assume that a March futures contract on the Mexican Peso was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso.
a. How could speculators capitalize on this situation, assuming zero transaction costs?
b. How would such speculative activity affect the difference between the forward contract price and the futures price? Explain.

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a. How could speculators capitalize on this situation, assuming zero transaction costs?

Speculators would capitalize on this situation and assume zero transaction costs by obtaining the futures for .09 per unit and then sell the same peso for 0.092 per peso at the same time. The ...

Solution Summary

Speculating with Currency Futures: Assume that a March futures contract on the Mexican Peso was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso.
a. How could speculators capitalize on this situation, assuming zero transaction costs?
b. How would such speculative activity affect the difference between the forward contract price and the futures price? Explain.

$2.19