7. 10. Exchange rates and arbitrage [LO 21.2] Suppose the spot and sixmonth forward rates on the...

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7. 10.

Exchange rates and arbitrage [LO 21.2] Suppose the spot and sixmonth forward rates on the Norwegian krone are Kr 8.39 and Kr 8.48, respectively. The annual risk-free rate in New Zealand is 3.8 per cent and the annual risk-free rate in Norway is 5.7 per cent 1. Is there an arbitrage opportunity here? If so, how would you exploit it?
2. What must the six-month forward rate be to prevent arbitrage?

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