The spot dollar-euro rate is $1.20/€1 and the forward rate is $1.15/€1. You expect the spot dollar- euro rate to be $1.05/€1 in one year's time. You have €1 million to speculate with using the forward exchange market. (i) (iii) (iv) Is the euro interest rate higher or lower than the dollar? Explain your reasoning. Do you buy or sell €1 million in the forward market? What is your profit in both euros and dollars if you are correct and the spot dollar- euro rate is $1.05/€1 in one year's time? What is your loss in both euros and dollars if you are wrong and the spot dollar-euro rate is $1.40/€1 in one year's time?

The spot dollar-euro rate is $1.20/€1 and the forward rate is $1.15/€1. You expect the spot dollar- euro rate to be $1.05/€1 in one year's time. You have €1 million to speculate with using the forward exchange market. (i) (iii) (iv) Is the euro interest rate higher or lower than the dollar? Explain your reasoning. Do you buy or sell €1 million in the forward market? What is your profit in both euros and dollars if you are correct and the spot dollar- euro rate is $1.05/€1 in one year's time? What is your loss in both euros and dollars if you are wrong and the spot dollar-euro rate is $1.40/€1 in one year's time?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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