Question
Mr John Barclay is a FOREX trader who noticed the following quotes: Spot exchange rate :$ = 1.3527 Three-month forward exchange rate :$ = 1.3585
Mr John Barclay is a FOREX trader who noticed the following quotes:
Spot exchange rate :$ = 1.3527
Three-month forward exchange rate :$ = 1.3585
Three-month interest rate 2.4% per year
Three-month $ interest rate 6.0% per year
i) Does the interest rate parity relation hold based on the information above and ignoring transactions costs? Provide your workings and full calculations, when answering this question. [5 marks]
ii) Do the above quotes present an arbitrage opportunity? If yes, what steps would Mr Barclay need to take to make an arbitrage profit? Assuming that Mr Barclay was authorized to work with 500,000, how much arbitrage profit would he make in GBP? Provide your workings and full calculations, when answering this question.
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