Suppose the spot and six-month forward rates on the deutsche mark are DM 1.55 and DM 1.62,

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Suppose the spot and six-month forward rates on the deutsche mark are DM 1.55 and DM 1.62, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in Germany is 8 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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Fundamentals Of Corporate Finance

ISBN: 9780072553079

6th Edition

Authors: Stephen A. Ross, Randolph Westerfield, Bradford D. Jordan

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Question Posted: Oct 05, 2023 05:05 AM

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Suppose the spot and six-month forward rates on the deutsche mark are DM 1.55 and DM 1.62,

Question:

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ANSWER To determine if there is an arbitrage opportunity we need to compare the actual forward rate ...View the full answer

Fundamentals Of Corporate Finance

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