Suppose you observe a spot exchange rate of $2.00/. If interest rates are 5 percent APR in
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Question:
- Suppose you observe a spot exchange rate of $2.00/. If interest rates are 5 percent APR in the U.S. and 2 percent APR in the U.K., what is the no-arbitrage 7-year forward rate? Hint: in (USD/GBP)
- Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate.
Suppose you are a pound-based investor, determine the pound profit amount.
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