Question
In early 2001, the spot exchange rate between the GBP and the Brazilian Real was 1.325700 GBP/Real. The 6-month interest rate in UK is 4.7800%
In early 2001, the spot exchange rate between the GBP and the Brazilian Real was 1.325700 GBP/Real. The 6-month interest rate in UK is 4.7800% and the Real rate is 2.8200%. Based on the table below, what should the 6-month GBP/Real forward rate be to prevent arbitrage opportunities? Show all calculation to 5 decimal places.
1. What should the 6-month GBP/Real forward rate be to prevent arbitrage opportunities.
2. Suppose the the 6-month GBP/Real forward rate is 1.36840 What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?
Pricing Inputs: DC/FC
Spot Price (GBP/Euro): 1.325700
Time to expiration (in years): .5
Domestic Currency (GBP) Interest rate: 4.780%
Foreign Currency (Real) Interest Rate: 2.820%
Forward Rate (GBP/Real): ?
No other data given.
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Problem 1 To prevent arbitrage opportunities the 6month GBPReal forward rate should be 1329660 The s...
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Fundamentals of Futures and Options Markets
Authors: John C. Hull
8th edition
978-1292155036, 1292155035, 132993341, 978-0132993340
