Suppose the forward price of a currency is given by F(t, T) = X+*e^((r- rf)*(Tt)) where...
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Suppose the forward price of a currency is given by F(t, T) = X+*e^((r- rf)*(Tt)) where X+ is the price and T is the maturity a) Show that if F(t, T) < X+*e^((r - rf)*(T-t)), then arbitrage profits can be made because F(t, T) is "too low" and Xt is "too high," b) Show also that if F(t, T) > X+*e^((r - rf)*(T - t)), then arbitrage profits can be made Suppose the forward price of a currency is given by F(t, T) = X+*e^((r- rf)*(Tt)) where X+ is the price and T is the maturity a) Show that if F(t, T) < X+*e^((r - rf)*(T-t)), then arbitrage profits can be made because F(t, T) is "too low" and Xt is "too high," b) Show also that if F(t, T) > X+*e^((r - rf)*(T - t)), then arbitrage profits can be made
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a ANSWER Ft T Xter rfTt This implies that Xt Ft TerrfTt This implies that arbit... View the full answer
Related Book For
Discrete Mathematics and Its Applications
ISBN: 978-0073383095
7th edition
Authors: Kenneth H. Rosen
Posted Date:
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