Question:
The current spot exchange rate is $1.55/£ and the 3M forward rate is $1.50/£. On the basis of your analysis of the exchange rate, you are pretty sure the spot will be $1.52/£ in 3M time. Assume that you'd like to buy or sell £1million.
a) What actions do you need to take to speculate in the forward market? What is the expected dollar profit?
b) If in 3M the spot turns out to be $1.46/£, what is your profit/loss in dollar terms?