Question
Spot exchange rate S (GBP/EUR) = 1.15 360-day forward rate F 360 (GBP/EUR) = 1.20 U.K. interest rate I UK = 10.0% EU interest rate
| Spot exchange rate | S(GBP/EUR) | = | 1.15 |
| 360-day forward rate | F360(GBP/EUR) | = | 1.20 |
| U.K. interest rate | IUK | = | 10.0% |
| EU interest rate | IEU | = | 5.0% |
A) What is the theoretical Forward rate that should prevail in this market under IRP?
B) As a UK investor how would you exploit the arbitrage opportunity? YOU MUST: Outline all steps necessary and determine the GBP profit that an investor could net on a 1,000GBP basis NOTE: GBP profit can be determined as of today, time = 0 days OR in the future, time = 360 days (your choice).
C)What factors (list at least 2) keep arbitrage opportunities like this from occurring in practice?
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Intermediate Financial Management
Authors: Eugene F Brigham, Phillip R Daves
9th Edition
032431986X, 9780324319866
