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....

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 that the spot rate is $1.3435 to the euro and that 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. In a Word document, include the following: Explain how this leader in your firm 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 can be earned and the percentage return achieved. Recommend whether this speculative investment or another investment with similar or higher returns at lower risk should be selected. Explain your reasoning. Be sure to consider how the inflation rate would affect the return.
Solutions: Amount of investment = $500,000
Spot Rate- 1 Euro = $ 1.3435
12 months Forward Rate = $ 1.3705.
The speculation may be based on many facts at present and the expectation conceived out of the news in the market. There are many ways, the exchange rate to increase in the next 12 months. The expected forward rate is $1.3705, however forward rate of $1.41 per euro means that US Dollar depreciates against Euros. It means there are certain events which may occur in near future in United States to have an impact on the currency. This may be the reason that the US elections will happen in near future and there will be a new government coming with different...