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Assume the following information about exchange rates between the U.S. dollar ($) and British pound (): Spot Exhange Rate: $1.50/ 60-day Forward Exchange Rate: $1.47/
Assume the following information about exchange rates between the U.S. dollar ($) and British pound ():
Spot Exhange Rate: | $1.50/ |
60-day Forward Exchange Rate: | $1.47/ |
120-day Forward Exchange Rate: | $1.45/ |
Annualized Interest Rates | 60-day | 120-day |
---|---|---|
U.S. | 4% | 4.5% |
U.K. | 5% | 5.6% |
a) What is the no-arbitrage 120-forward price for the pound sterling?
b) Show how you could make an arbitrage profit over the 120-day [eropd based on the quoted price of the pound sterling
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