Question

Current exchange rate (Feb 15, 2018) is .8011 Euro/$. You speculate the exchange rate will be .8210 Euro/$ on Mar 15, 2018. You plan to make money in the currency exchange market through the 'Short-selling' method. In this case, the first step is you borrow ________.

Answer 1

• borrow euros

Step-by-step explanation:

You borrow euros to buy dollars.

Assume you borrow $100 euros and buy Euros at the rate 0.8011Euro/$:

• 100 euros × ( 1 / 0.8011Euro/$) = 124.83$

That means that, on Feb 14, 2018, with 100 euros you buy $124.83.

Then, you keep the dollars until Mar 15, 2018 and sell them at the rate of 0.8210 Euro/$:

• 124.83$ × 0.8210 Euro/$ = 102.49 Euro.

In that way, you converted 100Euro into 102.49Euro in 30 days.

That is a return of [102.49 - 100] / [100] × 100 = 2.49%. Then, if you borrowed at a rate less than 2.49% per month, you earned by speculating through the "Short-selling" method.