In early 2001, the spot exchange rate between the GBP and the Brazilian Real was 1.325700 GBP/Real. The 6-month interest rate in UK is 4.7800% and the Real rate is 2.8200%. Based on the table below, what should the 6-month GBP/Real forward rate be to prevent arbitrage opportunities? Show all calculation to 5 decimal places.

1. What should the 6-month GBP/Real forward rate be to prevent arbitrage opportunities.

2. Suppose the the 6-month GBP/Real forward rate is 1.36840 What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?

Pricing Inputs: DC/FC

Spot Price (GBP/Euro): 1.325700

Time to expiration (in years): .5

Domestic Currency (GBP) Interest rate: 4.780%

Foreign Currency (Real) Interest Rate: 2.820%

Forward Rate (GBP/Real): ?

No other data given.

Answer rating: 100% (QA)

Problem 1 To prevent arbitrage opportunities the 6month GBPReal forward rate should be 1329660 The s... View the full answer