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 the spot rate is $1.3435 to the euro, and 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. Explain how she 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 will be earned and the percentage return achieved. Also, recommend whether this speculative investment or another investment with similar or higher returns at lower risk should be selected.
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