Question: Consider a currency trader based in the United States. The current spot rate is $0.90 per euro. The risk-free rate in the United States is

Consider a currency trader based in the United States. The current spot rate is $0.90 per euro. The risk-free rate in the United States is 7 percent, and the euro risk-free rate is 5 percent. The current forward price on a one-year contract is $0.85 per euro.
a. Calculate the arbitrage-free forward price.
b. Based on the current forward price of $0.85 per euro, indicate how the trader can earn a risk-free arbitrage profit.

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a To prevent any arbitrage opportunities the forward price F should be F 090107105 091714 per euro b ... View full answer

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