A leader in your firm has been studying the foreign exchange market for a number of years and believes that she can predict several of the foreign currency exchange rates relative to the U.S. dollar. The firm has $150,000 to invest in the spot, forward, or options markets. The spot rate is $1.2622 to the euro, and in 12 months will be $1.33 to the euro. Explain how she can speculate on the belief that the euro will be $1.33 in 12 months. Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved.
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Foreign exchange refers to money denominated in the currency of another country. The exchange rate is a price-the number of units of one nation's currency that must be surrendered in order to acquire one unit of another nation's currency. In the spot market, there is an exchange rate for every other national currency The forex market is essentially governed by the law of supply and demand and is generally not regulated by any government or coalition of governments. This is true in the U.S., where participation in the forex market is not regulated. The prices set for each country's money is determined by the desire of those trading to acquire more of it or to hold less of it. Each individual acts on the belief that he or she will benefit from the transaction.
According to the law of supply, as prices rise for a given item (in this case money), the quantity of the item that is supplied will increase; conversely, as the price falls, the quantity provided will fall. The law of ...
Foreign exchange is articulated.