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1. James Smith is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. James thinks the yen will move to 128.00/$ in the next six months.

(1) If James buys $100,000 worth of yen at today's spot price his potential gain is ___________ and his potential loss is ___________.

A) $100,000; unlimited

B) unlimited; unlimited

C) $100,000; $100,000

D) unlimited; $100,000

(2) If James's expectations are correct, then he could profit in the forward market by _____________ and then _____________.

A) buying yen for 128.00/$; selling yen at 128.53/$

B) buying yen for 128.53/$; selling yen at 128.00/$

2. David Dao of United Airlines, Inc. believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has $100,000 to invest. The current spot rate is $0.5825/SF, the 3-month forward rate is $0.5642/SF, and he expects the spot rates to reach $0.6251/SF in three months.

(1) Calculate David's expected profit assuming a pure spot market speculation strategy.

(2) Calculate David's expected profit assuming he buys (or sells) SF three months forward.

3. Jacob Singleton trades currency for Karma Capital of Geneva. Jacob has $10 million to begin with, and he must state all profits at the end of any speculation in U.S. dollars. The spot rate on the euro is $1.3358/, while the 30-day forward rate is $1.3349/.

(1) If Jacob believes the euro will continue to rise in value against the US dollar, so that he expects the spot rate to be $1.3600/ at the end of 30 days, what should he do?

(2) If Jacob believes the euro will depreciate in value against the US dollar, so that he expects the spot rate to be $1.2800/ at the end of 30 days, what should he do?

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