Problem 5 Suppose the 12-month forward price of the pound in terms of dollars is 1.5...

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Problem 5 Suppose the 12-month forward price of the pound in terms of dollars is 1.5 dollars per pound and the spot price of of the pound in terms of dollars is 1.55. Assume also that currently the annual interest rate on dollar deposits is 2%, while the interest rate on a comparable pound deposit is 4%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make riskless profits. Problem 5 Suppose the 12-month forward price of the pound in terms of dollars is 1.5 dollars per pound and the spot price of of the pound in terms of dollars is 1.55. Assume also that currently the annual interest rate on dollar deposits is 2%, while the interest rate on a comparable pound deposit is 4%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make riskless profits.

Answer rating: 100% (QA)

ANSWER To determine if there is an arbitrage opportunity we need to compare the forward exchange rat... View the full answer