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

answer; rapid growth in buyer demand and high buyer switching cost;