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Spot and 90-day forward prices for US dollars are quoted in London at 0.9674 and 0.9628 respectively. The annual interest rate in the USA is
Spot and 90-day forward prices for US dollars are quoted in London at 0.9674 and 0.9628 respectively. The annual interest rate in the USA is 1.2% and in the UK it is 3%.
(a) Show that there is an arbitrage opportunity here and calculate how much arbitrage profit can be made on a single dollar at the end of 90 days.
(b) Show detailed transactions that would be needed to obtain this arbitrage profit.
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