Assume That the Spot Price for Converting Pounds into Dollars

question 59

Multiple Choice

Assume that the spot price for converting pounds into dollars is £1 = $1. A speculator converts £1 million into dollars today and enters into a forward contract to convert the dollars back into pounds after six months. If the spot rate after six months is £1 = $1.25, which of the following statements will be true?

• A) The speculator will make a profit of $0.25 million.
• B) The speculator will make a loss of £0.2 million.
• C) The speculator will make a loss of $0.8 million.
• D) The speculator will make a profit of £0.2 million.

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Definitions:

Broad Absorption

In spectroscopy, it indicates a wide range of wavelengths over which a substance absorbs electromagnetic radiation.

IR Absorption

A technique used to identify and study chemicals by measuring the absorption of infrared radiation at different wavelengths.

IR Spectroscopy

A technique used for identifying and studying chemicals by analyzing the infrared light absorbed, emitted, or scattered by the sample.

O-H Stretch

A vibrational mode in infrared spectroscopy indicating the presence of an O-H bond, useful in identifying alcohols, phenols, and acids.