Question
Assume that the 1-year interest rate in the US is 2% and the 1-year interest rate in Sweden is 4%. You have no additional information
Assume that the 1-year interest rate in the US is 2% and the 1-year interest rate in Sweden is 4%. You have no additional information on the spot or the forward rate.
a) Assume you observe in the market that the Swedish Kronor (SKR) trades at a forward premium to the US Dollar (USD). Is this evidence of an arbitrage opportunity? If yes, explain in detail how you would structure the sequence of trades to benefit from it and why you can be sure to generate a profit in that way (assuming you are free to borrow and invest at the stated interest rates, there is no bid-ask spread). If no, explain why not.
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Financial Institutions Management A Risk Management Approach
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
8th edition
978-0078034800, 78034809, 978-0071051590
