If a Speculator Observes That the Current 3-Months Forward Rate

question 27

Multiple Choice

If a speculator observes that the current 3-months forward rate on Swiss francs is $1.05 = 1 franc, but he/she expects that the spot rate in 3 months will be $1.10 = 1 franc, then this Speculator would now

• A) buy dollars on the forward market.
• B) buy francs on the forward market.
• C) sell francs on the forward market.
• D) buy francs on the spot market and simultaneously sell francs on the 3-months forward Market if the current spot rate is $1.07 = 1 franc.

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Definitions:

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together, revealing the strength and direction of their relationship.

Strength

The physical or mental capacity to exert force, resist challenges, or endure pressures.

Direction

Guidance or supervision towards a destination or in a particular course of action; also, the path that must be taken to reach a place.

Statistically Significant

A term indicating that the results of an analysis demonstrate a likelihood that the observed effects or differences are not due to chance.