What is the expected dollar payoff from speculation

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Reference no: EM131595458

The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.88/£ in three months. Assume that you would like to buy or sell £1,000,000. What actions do you need to take to speculate in the forward market and what is the expected dollar payoff from speculation?

sell £1,000,000 forward; expected profit is $30,000

buy £1,000,000 forward; expected profit is $20,000

sell £1,000,000 forward; expected profit is $20,000

buy £1,000,000 forward; expected profit is $30,000

Reference no: EM131595458

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