Description

The spot exchange rate for the British pound is $1.4390. The US interest rate is 6.3% per annum, and the British interest rate is 5.8% per annum (both with discrete compounding). A futures contract on the exchange rate for the British pound expires in 100 days.

(a) Find the appropriate futures price for a US investor.

(b) Suppose the actual price $1.4650. Is the future contract mispriced? If yes, how could an arbitrageur take advantage of the mispricing?