A speculator enters a futures contract for September delivery (September 19) of £62,500 on February 2. The futures exchange rate is $1.650 per pound. He believes that the spot rate for pounds on September 19 will be $1.700 per pound. The margin requirement is 2 percent. (a) If his expectations are correct, what would be his rate of return on the investment? (b) If the spot rate for pounds on September 19 is 5 percent lower than the futures exchange rate, how much would he lose on the futures speculation? (c) If there is a 65 percent chance that the spot rate for pounds will increase to $1.700 by September 19, would you speculate in the futures market?

Essentials Of Investments
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A speculator enters a futures contract for September delivery (September 19) of £62,500 on February 2. The futures exchange rate is $1.650 per pound. He believes that the spot rate for pounds on September 19 will be $1.700 per pound. The margin requirement is 2 percent.

(a) If his expectations are correct, what would be his rate of return on the investment?

(b) If the spot rate for pounds on September 19 is 5 percent lower than the futures exchange rate, how much would he lose on the futures speculation?

(c) If there is a 65 percent chance that the spot rate for pounds will increase to $1.700 by September 19, would you speculate in the futures market?

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