You also trade on the currency market. The current spot exchange rate is 10.5 HKD/GBP. The market one-year forward rate is now 10 HKD/GBP. Use positions in HKD and GBP zero- coupon bonds to capture the arbitrage profit. (You could use the following table to show the cash flows)

F0,1=10.5(1.06)/1.03=10.806(HKD/GBP)

How is theoretical forward price be derived?

Answer rating: 100% (QA)

The theoretical forward price is derived through the interest rate parity IRP formula which states t... View the full answer