Question: Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.97 and Kr 7.06, respectively. The annual risk-free rate in the United

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.97 and Kr 7.06, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate in Norway is 5 percent.

a. Is there an arbitrage opportunity here? If so, how would you exploit it?

b. What must the six-month forward rate be to prevent arbitrage?

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