Suppose you face a spot exchange rate of ¥110/$ and a 6-month forward rate of ¥95/$ and you wish to do a carry trade. Which of the following statements is correct? Select one: A. The carry trade implies buying yen forward and hoping the yen does not depreciate by more than 13.64% in six months. B. The carry trade implies buying dollars forward and hoping the dollar does not depreciate by more than 13.64% in six months.
Suppose you face a spot exchange rate of ¥110/$ and a 6-month forward rate of ¥95/$ and you wish to do a carry trade. Which of the following statements is correct?
The carry trade implies buying yen forward and hoping the yen does not
The carry trade implies buying dollars forward and hoping the dollar does not depreciate by more than 13.64% in six months.
The carry trade implies buying dollars forward and hoping the dollar does not depreciate by more than 6.82% in six months.
The carry trade implies buying yen forward and hoping the yen does not depreciate by more than 27.27% in six months.
The carry trade implies buying dollars forward and hoping the dollar does not depreciate by more than 27.27% in six months.
Assume a regression-based test of the unbiasedness hypothesis gives the following relationship between the rate of appreciation of the dollar/pound exchange rate and the forward premium: E(st+1) = -2.49 -1.25 fpt. You are a speculator who trusts these statistical results and you know that the pound trades currently at a 1.5% forward discount with respect to the dollar. What should you do?
Nothing, because the expected forward market return is 0.
Sell pounds forward, because the expected forward market return is - 0.615%.
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