On Jan 19th, the three-month forward rate for the Singaporean dollar (SGD) to New Zealand dollar (NZD) was SGD1.0260/NZD. At the same time, the spot rate was SGD 1.0180/NZD. A deranged scientist located in New Jersey had a hunch that the spot rate will be SGD 0.9800/NZD in three months. He or she decided to devote 10,000 New Zealand dollars in order to try to profit from this speculation.
a) What actions would this speculator take in the forward market?
b) What profit is expected if the prediction comes true? Specify the amount and currency.
c) What will be the loss if – despite the hunch – three months later the spot exchange rate turns out to be SGD1.0430/NZD?