Speculating that the spot rate of the Swiss franc in 3 months will be lower than its current 3-month forward rate.ĪSSUMPTION: In 3 months, the prevailing spot price of the franc will be $0.30. If assumption is wrong and the prevailing spot price in 3 months is lower than $0.40 per franc, you incur a loss. OUTCOME: If assumption is right, profit = $0.10 per franc. After receiving delivery of the francs in 3 months, resell them in the spot market at the prevailing price of $0.50 per franc. Contract to purchase a specified amount of francs in the forward market, at $0.40 per franc, for 3-month delivery.Ģ.
GIVEN: The current price of the 3-month forward franc is $0.40.ĪSSUMPTION: In 3 months, the prevailing spot price of the franc will be $0.50. Speculating that the spot rate of the Swiss franc in 3 months will be higher than its current 3-month forward rate. Your gains or losses will equal the difference between the current forward rate and the spot rate 30 days from now. You are willing to bet your money that the market consensus is wrong. You believe that in 30 days the pound'sspot rate will be only 5 percent lower (or maybe 15 percent higher) than it is today. As a speculator, however, you feel you have better information than the market. For example, suppose the 30-day forward pound is selling at a 10 percent discount this dis-Ĭount is the market'sconsensus (average expectation) that in 30 days the spot rate of the pound will be 10 percent lower than it is today. In practice, most speculation is done in the forward market.įorward market speculation occurs when a speculator believes that a currency's spot price at some future date will differ from today'sforward price for that same date. The bank may impose a margin requirement, requiring the speculator to put up, say, 10 percent of the value of the foreign contract as security. All the speculator needs to do is sign a forward contract with a bank to either purchase or sell a specified amount of foreign currency at a specified date. Speculation in the forward market, however, does not require cash or credit facilities. If assumption is wrong and the spot price of the franc rises in 3 months instead, you incur a loss buying francs at a higher price than the initial selling price.Īlthough speculation on the spot market can lead to profits, it has a serious drawback: The speculator must have a large amount of idle cash or borrowing privileges, which require interest payments. (This return is reduced by the interest paid on borrowed money, but increased by the interest received on the bank savings account). OUTCOME: If assumption is right, profit = $0.15 per franc. In 3 months, buy francs at the prevailing spot price of $0.25 per franc and use them to pay back the loan. $0.40 per franc, and deposit the dollars in a bank to earn interest.Ģ. Borrow francs today, exchange them for dollars at the prevailing spot price of ASSUMPTION: In 3 months, the spot price of the franc will fall to $0.25.ġ. GIVEN: Today's spot price is $0.40 per franc. Speculating on a Swiss franc depreciation. If assumption is wrong and the spot price of the franc falls instead, you incur a loss, reselling francs at a price lower than the purchase price. In 3 months, sell the francs at the prevailing spot price of $0.50 per franc. Purchase francs at today'sspot price of $0.40 and deposit them in a bank to earn interest.Ģ. ASSUMPTION: In 3 months, the spot price of the franc will rise to $0.50.ġ. Speculating on a Swiss franc appreciation. Imagine that you are a currency speculator in New York, willing to risk money on your opinion about future prices of a foreign currencysay, the Swiss franc. Let us examine the techniques of speculating in these markets. Speculation in the foreign-exchange market can be conducted in the spot market and the forward market.
0 kommentar(er)
