Question
5) Which of the following is true if one year forward rate is F=1.83$/; current spot rate is S=1.81$/; and interest rates are i =3.5%,
5) Which of the following is true if one year forward rate is F=1.83$/; current spot rate is S=1.81$/; and interest rates are i=3.5%, and i*=3% (where exchange rates are quoted in $/, i is the interest rate in the U.S. and i* is the interest rate in the U.K.)?
a) Arbitrage is not possible
b) Arbitrage is possible and arbitrage strategy involves buying forwards
c) Arbitrage is possible and arbitrage strategy involves selling forwards
d) Arbitrage is possible; however, there is not enough information to pick one of the answers above.
The answer is C
But I don't know why, could you give me a detail explanation? Thank you very much
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