Question

If you believe the Brazilian real will fall from the present spot rate of $0.2255 / Brazilian real, which speculative strategy would yield the largest speculative gain? a. buy futures on Brazilian real b. none of the other answers c. buy call options on the Brazilian real d. sell futures on Brazilian real

Answer 1

Strategy that shall yield largest speculative gain is = d. sell futures on brazilian real

Now, selling futures means taking short position .Under short position, the investor shall enter into a contract to sell at a future date,

If the price of Brazilian real is possible to fall from present spot rate, then selling future shall be a profitable strategy.Selling future contract means that at a future date investor shall sell stock at the already contracted price, and if price will decline then investor shall be able to sell at a already contracted price which is higher than existing price. This strategy shall lead to profits.

On the other hand starategy of buying future shall lead to loss, because buying future means buying stock at a future contracted date at the already agreed price. In such a case if price falls then the investor shall be buying at a higher contracted price.

Also, if investor buys call option and becomes call buyer, and if price declines in future, then in that case the exercise price shall be higher than the existing market price and incur losses.