I’m in an international finance class and I need to write a paper about the yen and whether I would recommend purchasing futures or options in the yen. I’ve read all the chapters in the text and looked up articles and I still don’t get it. If the exchange rates are changing and the dollar is worth less than the yen in a month than it is now, how can you profit? Should you buy or sell futures if I think the yen will appreciate? I need someone to ELI5.
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Let’s say you are going on vacation to Japan in 6 months and someone in Japan is coming to the US for a vacation 6 months. Neither of you really know what the exchange rate will at that time, neither of you have the money now but you want to start planning. You find this person and agree on a rate to swap you money at in 6 months.
Now…it is not easy to find that person but a bank can and will charge BOTH of you a fee to act between both of you, decide what the rate will be and handle the transaction.
How does the bank decide the rate? The bank deal with LOTS of people and if more people want Yen in 6 months then the rate for the Yen will go up. If less people want Yen in 6 months then the rate will go down.
You are given the bank a fee (few percent) to get a fixed rate some point in the future.
How can you make money off of this? Let’s say TODAY you agree with the bank buy 1,000,000 YEN for $10,000 on Feb 2, 2023.
If in 6 months on Feb 2, 2023 the ACTUAL exchange rate is 110 YEN for each $1USD you buy the 1,000,000 YEN for $10,000USD. You then take the 1,000,000 YEN and then exchange it back to $9,090.91USD and lose $909.09 USD (less bank fees).
If in 6 months on Feb 2, 2023 the ACTUAL exchange rate is 90 YEN for each $1USD you buy the 1,000,000 YEN for $10,000USD. You then take the 1,000,000 YEN and then exchange it back to $11,111.11USD and gain $1,111.11 USD (less bank fees).
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