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In this problem the domestic currency is the dollar and the foreign currency is the dinar. Today (time 0) the price of 1 dinar
In this problem the domestic currency is the dollar and the foreign currency is the dinar. Today ("time 0") the price of 1 dinar is $20. A dealer offers forward contracts on 1 dinar (long or short positions) expiring in 200 days. The delivery price is $16 and the down-payment (paid today by the long party) is $3.50. (In the table you may refer to it as "Contract 1".) The price today of a zero-coupon bond paying 1 dinar in 200 days is 0.9524 dinar. The price today of a zero-coupon bond paying 1 dollar in 200 days is 0.9709 dollar. Show that there is arbitrage. Elaborate on the transactions and the cash flows. If you wish, you can use lending/borrowing instead of bonds. Note: Please do not ask me regarding the appropriate notation for each one of the above numbers... Solution: Time-0 value Time-T value
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