Question: (ONLY ANSWER THIS QUESTION): Problem 3 Calculate the implied annual foreign risk-free rate in British pounds if the futures price in Problem 1b is equal

(ONLY ANSWER THIS QUESTION): Problem 3 Calculate the implied annual foreign risk-free rate in British pounds if the futures price in Problem 1b is equal to USD1.315/GBP. How would an investor construct a portfolio to earn this rate of return?

PART YOU NEED TO ANSWER THIS IS BELOW:

1. Calculate the fair value of the following contracts with 50 trading days (t = 50/250 = 0.20 years) to expiration and a continuously compounded annual risk-free rate of 1.5%.

B.A foreign exchange futures contract for British pounds with the current spot price of USD1.32/GBP and a continuously compounded annual foreign risk-free rate of 2.6%.

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