If assumption is wrong and the spot price of the franc rises in 3 months instead, you incur a loss buying francs at a higher price than the initial selling price.Īlthough speculation on the spot market can lead to profits, it has a serious drawback: The speculator must have a large amount of idle cash or borrowing privileges, which require interest payments. (This return is reduced by the interest paid on borrowed money, but increased by the interest received on the bank savings account).
OUTCOME: If assumption is right, profit = $0.15 per franc. In 3 months, buy francs at the prevailing spot price of $0.25 per franc and use them to pay back the loan. $0.40 per franc, and deposit the dollars in a bank to earn interest.Ģ. Borrow francs today, exchange them for dollars at the prevailing spot price of ASSUMPTION: In 3 months, the spot price of the franc will fall to $0.25.ġ. GIVEN: Today's spot price is $0.40 per franc. Speculating on a Swiss franc depreciation. If assumption is wrong and the spot price of the franc falls instead, you incur a loss, reselling francs at a price lower than the purchase price. OUTCOME: If assumption is right, profit = $0.10 per franc. In 3 months, sell the francs at the prevailing spot price of $0.50 per franc. Purchase francs at today'sspot price of $0.40 and deposit them in a bank to earn interest.Ģ. ASSUMPTION: In 3 months, the spot price of the franc will rise to $0.50.ġ. Speculating on a Swiss franc appreciation. Imagine that you are a currency speculator in New York, willing to risk money on your opinion about future prices of a foreign currencysay, the Swiss franc. Let us examine the techniques of speculating in these markets.
Speculation in the foreign-exchange market can be conducted in the spot market and the forward market.