Suppose that the spot rate of EUR is 1.0951 USD for 1 Euro. 1 year forward rate is 1.0963 USD for 1 Euro. Suppose that the 1 year USD interest rate is 0.65% annualized and Euro interest rate is 0.01% annualized (rates are compounded annually that means for example that 1 USD a year from now grows to 1*(1+0.65%) USD). Is there an arbitrage opportunity? If there is describe it.

2) Suppose that the spot exchange rate of EUR is 1.1000 USD for 1 Euro. Suppose that the 3 months USD interest rate is 0.60% annualized and Euro interest rate is 0.02% annualized (rates are continuously compounded). What is 3 month forward exchange rate?

3) What is the six-month forward price for a stock providing no income if the stock price is 100 and the continuously compounded interest rate is 1%? What is the forward price if the stock pays a 2% continuously compounded dividend yield?

4) What is the difference between forward contract and a futures contract?

Answer rating: 100% (QA)

1 To determine if there is an arbitrage opportunity we can compare the potential gains from two different strategies a Strategy 1 Convert 1 USD to EUR at the spot rate invest it in the Euro at the Eur... View the full answer