Question: 3. (a) Can the forward discount be viewed as the cost of hedging an accounts receivable? Discuss. (20 marks) (b) Given the following data on

3. (a) Can the forward discount be viewed as the cost of hedging an accounts receivable? Discuss. (20 marks)

(b) Given the following data on various currencies (including some historical ones, namely BEF, DEM, NLG, ITL and FRF) for the spot rate St, the forward rate Ft,T, the domestic interest rate rt,T and the foreign interest rate r*t,T respectively), are there any arbitrage opportunities? If so, how would you make a risk-free profit? (40 marks)

(i) BEF/DEM 20.5 20.60 3.5% 2.5%

(ii) JPY/NLG 57.5 57.10 1.25% 3.0%

(iii) ITL/FRF 283.0 285.73 4.5% 3.5%

(iv) CHF/GBP 2.2 2.18 2.0% 3.0%

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