– It is often argued that forward exchange rates should be unbiased predictors of future spot exchange rates if the foreign exchange market is efficient. Is this true or false? Why?
– the current spot rate is $1.20/â‚¬, and you expect the future spot rate in 90 days to be $1.21/â‚¬. What contract would you make to speculate in the forward market by either buying or selling â‚¬10,000,000? What is your expected profit? If the standard deviation of the 90-day rate of appreciation of the euro relative to the dollar is 3%, what range covers 95% of your possible profits and losses?
– Suppose that the spot exchange rate is $1.55/Â£, that the beta on a forward contract to buy pounds with dollars is 1.5, and that the expected excess dollar rate of return on the market portfolio is 7%. What is the expected profit or loss on a forward purchase of Â£1,000,000? Explain how this can be an equilibrium.
– Suppose the British pound (GBP) is pegged to the euro (EUR). You think there is a 5% probability that the GBP will be devalued by 10% over the course of the next month. What interest differential would prevent you from speculating by borrowing GBP and lending EUR?
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