Consider a three-month forward contract on pound sterling. The spot exchange rate is $1.40/ (that is 1
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Consider a three-month forward contract on pound sterling. The spot exchange rate is $1.40/£ (that is 1£ is equivalent to $1.40). The interest rate on the dollar (domestic currency) is 2% per annum with continuous compounding; and the interest rate on the pound (foreign currency) is 3% per annum with continuous compounding. If the forward price is given to be $1.35/£, identify whether there is any arbitrage opportunity and explain in detail how you would implement it.
Related Book For
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee
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