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Assume a forward contract on pound sterling. Suppose the spot exchange rate is $1.60/pound. Suppose the three month interest rate on dollar is 6% while
Assume a forward contract on pound sterling. Suppose the spot exchange rate is $1.60/pound. Suppose the three month interest rate on dollar is 6% while the three month interest rate on pound is 8%, both continuous compounding terms. What is the arbitrage free three month forward rate?
(a) What is the arbitrage free forward price?
(b) Suppose the delivery price of the forward contract differed from answer in (a) and instead let F = $1.615. Explain the arbitrage strategy one should follow? Explain your answer in detail.
also explain how to use the calculations in a calculator.
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