Question
(15 points) Assume the one-year interest rate is 8% on GBP and 1% on EUR. At the same time, inflation is running at an annual
- (15 points)Assume the one-year interest rate is 8% on GBP and 1% on EUR. At the same time, inflation is running at an annual rate of 3% in Germany and 1.5% in UK. The current spot rate is EUR/GBP 1.17.
a) If the one-year forward premium of the euro against the pound is 8%, is there an arbitrage opportunity? Explain.
b) If there is an arbitrage opportunity, will the British or the German investor be able to make a profit? How much will an investor's profit be if he can invest GBP100,000 or EUR180,000 for 1 year? Assume that he owns this money and does not borrow. Please show your work.
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Intermediate Financial Management
Authors: Brigham, Daves
10th Edition
978-1439051764, 1111783659, 9780324594690, 1439051763, 9781111783655, 324594690, 978-1111021573
