Suppose the spot and six-month forward rates on the Norwegian krone are Kr 7.87 and Kr 7.97,

Question:

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 7.87 and Kr 7.97, 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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Corporate Finance

ISBN: 978-1259918940

12th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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Question Posted: Dec 13, 2019 07:31 AM

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Suppose the spot and six-month forward rates on the Norwegian krone are Kr 7.87 and Kr 7.97,

Question:

Step by Step Answer:

a If IRP holds then F 180 Kr 7871 05 03 12 F 180 Kr 79483 Sinc...View the full answer

Corporate Finance

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