Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.15 and Kr 5.22,
Question:
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.15 and Kr 5.22, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 percent.
a. Is there an arbitrage opportunity here? If so, how would you exploit it?
b. What must the six-month forward rate be to prevent arbitrage?
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ANSWER a To determine if there is an arbitrage opportunity we need to compare the available rates an...View the full answer
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Related Book For 
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ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
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