1. Assume a speculator anticipates that the spot rate of the franc in three months will be lower than today's three-month forward rate of the franc, $0.50 ¼ 1 franc.
a. How can this speculator use $1 million to speculate in the forward market?
b. What occurs if the franc's spot rate in three months is $0.40? $0.60? $0.50?
2. You are given the following spot exchange rates: $1 ¼ 3 francs, $1 ¼ 4 schillings, and 1 franc ¼ 2 schillings. Ignoring transaction costs, how much profit could a person make via three-point arbitrage?