Answer to Question 4:

Suppose that the spot price of the Swiss franc in terms of the Australian dollar is 0.72 dollars. The 90-day forward price is A$ 0.81. A currency trader who is willing to ignore risk considerations and thinks the Swiss franc will be worth 0.90 Australian dollars in 90 days should

1. sell francs forward in return for Australian dollars.

2. sell Australian dollars forward in return for francs.

3. buy Swiss francs forward in return for the Australian dollars.

4. do either 2 or 3.

Choose the correct option.


The correct choice is option 4. A forward sale of the Australian dollar commits the trader to buy Swiss francs for 0.81 Australian dollars each in 90 days. When that time comes, he expects to be able to sell those francs for 0.90 Australian dollars each, for a net gain of 9 Australian cents per unit. Notice that a forward sale of the Australian dollar is equivalent to a forward purchase of the Swiss franc in this case. The trader is short on Australian dollars and long on Swiss francs.

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