Assume that the spot exchange rate is GBP 1.00 = EUR 1.20. The continuously-compounded British and European interest rates are 3% and 7% per annum respectively.

You notice that forward contracts with delivery in 9 months time are trading at GBP 1.00 = EUR 1.30. This is not what the forward rate should be and therefore presents an arbitrage opportunity!

Required:

Clearly describe the trades that you must execute today (time 0) to capture the arbitrage profit on offer from this mispricing.

You must be very clear as to what the required trades are, which countries they are made in and the numerical amounts.

You do not need to prepare the full payoff table showing cashflows at T=9 months. I am only asking for the time 0 trades.