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 $500,000 to invest in the spot, forward, or options markets. Assume that the spot rate is $1.3435 to the euro and that the forward rate for 12 months is $1.3705 to the euro. However, this leader is sure that the exchange rate in 12 months will be $1.41 to the euro.
In a 3 page Word document, include the following:
- Explain how this leader in your firm can speculate on the belief that the euro will be $1.41 in 12 months.
- Calculate the amount of profit (ignoring exchange rate fees) that can be earned and the percentage return achieved.
- Recommend whether this speculative investment or another investment with similar or higher returns at lower risk should be selected. Explain your reasoning.
- Be sure to consider how the inflation rate would affect the return.