Question

Jasper Pernik 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/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper'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/$; selling yen at ¥128.00/$
C) There is not enough information to answer this question.
D) He could not profit in the forward market.

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that:

Spot price for the Japanese yen is ¥129.87/$ i.e 1 yen = 1/129.87 = $0.007700

6- month forward rate is ¥128.53 $i.e

1 yen = $0.00780

Yen will move to ¥128.00/$ in the next six months i.e.

1 yen = 1/128

         = $0.007813

Here there is opportunity of profit when he purchase yen at forward rate of:

$0.007800 i.e at ¥128.53/$ and sells at 0.007813 i.e at ¥128.00/$ making a profit of $0.000013 per yen.

Therefore, the correct answer is option B i.e buying yen for ¥128.53/$; selling yen at ¥128.00/$.