Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.95 and Kr 7.03, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 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?