Question

S(USD/EUR) = 0.80001y, F(USD/EUR) = 0.8080rEUR, 1y = 14%rUSD, 1y = 10%. How to speculate? Is there any risk?

a) Buy USD/EUR, as the spot rate is expected to increase.
b) Sell USD/EUR, as the forward rate is lower than the spot rate.
c) Buy EUR/USD, as the interest rate in the USD is higher.
d) Both a and c.

Answer 1

To speculate in this scenario, the best option would be to Buy USD/EUR. The spot rate is expected to increase, indicating a potential profit. The interest rate in the USD is higher, making it more attractive to investors.

Step-by-step explanation:

To speculate in this scenario, the best option would be to Buy USD/EUR. The spot rate is expected to increase, indicating a potential profit. Additionally, the interest rate in the USD is higher, making it more attractive to investors. There is some risk involved, as exchange rates can fluctuate, but based on the given information, this seems like the most favorable choice.