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Background On September 9, 2020, the British Pound was trading at $1.3196/. That is, So = $1.3196. The one-year risk-free rates on September 9 are
Background On September 9, 2020, the British Pound was trading at $1.3196/. That is, So = $1.3196. The one-year risk-free rates on September 9 are rs = 0.12% and r = -0.56%, respectively (note, the risk-free rate in the UK is nega- tive). Assume you work for an American financial institution, Nova Capital Partners and your job is to arbitrage mispricings in currency markets. Assume the December 2021 British pound forward contract has a maturity of 15 months. (a) (1 Point) What is the no-arbitrage forward exchange rate for the Decem- ber 2021 contract? (b) (2 Points) Suppose on September 9, the December 2021 British pound forward contract is trading at Fo = $1.3341. Conduct an arbitrage, show- ing all steps of the arbitrage, using 100,000 units of currency. Make sure that all profits are in U.S. dollars. (c) (2 Points) Suppose instead, the December 2021 British pound forward contract is trading at Fo = $1.3276. Conduct an arbitrage, showing all steps of the arbitrage, using 100,000 units of currency. Make sure that all profits are in U.S. dollars
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