Question
In early 2019, the spot exchange rate between the US dollar and the Euro was 1.855700 $/Euro. The 6-month interest rate in the US is
In early 2019, the spot exchange rate between the US dollar and the Euro was 1.855700 $/Euro. The 6-month interest rate in the US is 3.5700% and the Euro rate is 2.3400%. Based on the table below, what should the 6-month $/Euro forward rate be to prevent arbitrage opportunities? Show all calculation to 6 decimal places.
1) What should the 6-month $/Euro forward rate be to prevent arbitrage opportunities?
2) Suppose the the 6-month $/Euro forward rate is 1.871795. 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)?
3) Suppose the the 6-month $/Euro forward rate is 1.865367. What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?
Pricing Inputs | DC/FC |
Spot price ($/Euro) | 1.855700 |
Time to expiration (in years) | 0.5 |
Domestic Currency ($) interest rate | 3.5700% |
Foreign Currency (Euro) Interest Rate | 2.3400% |
Forward Rate ($/Euro) | 1.8671477 |
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