You Believe That the U

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The Answer is If you believe that the U.S. dollar will appreciate against the euro over its current forward exchange rate, you can take the following action:

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Today: Borrow euros.
Sell my euros and buy U.S. dollars at the current spot rate.
Lend those U.S. dollars.

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In a few weeks: Sell those U.S. dollars and buy euros at the new spot rate.
If your assumption turns out to be correct, I will make a profit, unless the interest rate differential already reflects the expectation that the dollar will strongly appreciate.
An equivalent action to be taken today is to enter a forward exchange contract to sell euros and buy U.S. dollars at the current forward exchange rate, with delivery taking place in a few weeks. At maturity, you will make a profit if the spot €/$ has strongly risen.
Other derivative contracts, such as currency options or swaps, can also be used (see Chapters 10 and 11).

You Believe That the U

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You Believe That the U

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Correct Answer:VerifiedShow Answer

Correct Answer:
Verified