Assuming a speculator believes that the Canadian Dollar (CAD) is likely to appreciate versus the US Dollar and the Mexican Peso (MXN) is likely to depreciate versus the US Dollar. How can the speculator create a trade without using the US Dollar? Select all that apply
Buy MXN/CAD
Buy CAD/MXN
Sell CAD/MXN
Sell MXN/CAD
The Correct Answer and Explanation is:
Correct answers:
- ✅ Buy CAD/MXN
- ✅ Sell MXN/CAD
Explanation:
A speculator expects:
- Canadian Dollar (CAD) to appreciate (increase in value)
- Mexican Peso (MXN) to depreciate (decrease in value)
- The trade must not involve the US Dollar (USD) directly.
In the foreign exchange (forex) market, currency pairs are quoted in the format Base/Quote, where:
- Base currency is the first in the pair.
- Quote currency is the second.
- The price tells how much of the quote currency is needed to buy one unit of the base currency.
Analyzing the Pairs:
✅ 1. Buy CAD/MXN
- Base: CAD
- Quote: MXN
- This means the speculator is buying Canadian Dollars and selling Mexican Pesos.
- If the CAD appreciates and MXN depreciates, the CAD becomes more valuable relative to the MXN.
- The price of CAD/MXN will increase, resulting in a profit for someone who bought CAD/MXN.
- ✅ This is a correct trade.
✅ 2. Sell MXN/CAD
- Base: MXN
- Quote: CAD
- This means the speculator is selling Mexican Pesos and buying Canadian Dollars.
- If MXN weakens and CAD strengthens, the price of MXN/CAD will fall, meaning fewer CAD are needed to buy 1 MXN.
- Selling at a higher price and buying back at a lower price earns a profit.
- ✅ This is also a correct trade.
❌ Incorrect Choices:
❌ Buy MXN/CAD
- This means buying Mexican Pesos and selling Canadian Dollars.
- This would lose money if the MXN weakens and CAD strengthens.
- ❌ Incorrect given the speculator’s outlook.
❌ Sell CAD/MXN
- This is betting that CAD will weaken against MXN.
- Since the expectation is the opposite (CAD up, MXN down), this is ❌ incorrect.
Conclusion:
To profit from CAD appreciating and MXN depreciating without using USD:
- ✅ Buy CAD/MXN
- ✅ Sell MXN/CAD