Christoph Hoffeman of Kapinsky Capital believes the Swiss franc will appreciate versus the U. S. dollar in the coming 3-month period. He has $100 comma 000 to invest. The current spot rate is $0.5824 /SF, the 3-month forward rate is $0.5639 /SF, and he expects the spot rates to reach $0.6254 /SF in three months. a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy. b. Calculate Christoph's expected profit assuming he buys or sells SF three months forward.

Check the explanation

Explanation:

a. Calculate Christoph's expected profit assuming a pure spot market speculation strategy.

Details Amount

Number of Swiss francs can buy and

invest with $100,000 ($100,000/$0.5820) 171821.31

After 3 months SF's are sold to acquire

dollars back SF 171821.31 * $0.6250) $107,388

Less: Invested dollars $ 100,000.00

expected profit assuming he buys or sells

SF three months forward $7,388

b. Calculate C's expected profit assuming he buys or sells SF three months forward:

Details Amount

Number of Swiss francs can buy and

invest with $100,000 ($100,000/$0.5640 $ 177304.96

After 3 months SF's are sold to acquire

dollars back SF 177,304.96 * $0.6250) $ 110,815.60

Less: Invested dollars $ 100,000.00

expected profit assuming he

buys or sells SF three months forward $10,816