oday's exchange rate between British pounds and US dollars is 1:1.29, meaning 1 pound is worth 1.29
Question:
oday's exchange rate between British pounds and US dollars is 1:1.29, meaning 1 pound is worth 1.29 dollars. For simplicity, we say the exchange rate between pound and dollar is 1.29. Consider a forward contract on the exchange rate with terminal T = i. Holding this contract, at T, you are obligated to purchase one pound according to a pre-specified exchange rate F. Assurne UK's interest rate is 1%, and US's interest rate is 2.25%. Both interest rates are continuous compounded. What is the arbitrage-free rate F? (Hint: tink about 1 pound as 1 share of a stock. Try to understand what's the meaning of UK's and US's interest rates in this sense. Then use cash-and-carry to figure out F.)
Fundamentals Of Investing
ISBN: 9780135175217
14th Edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk