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Suppose 1-year interest rates are 8% per annum in the US and 5% per annum in France, and that the spot exchange rate is $1.2500/.
Suppose 1-year interest rates are 8% per annum in the US and 5% per annum in France, and that the spot exchange rate is $1.2500/. The 1 -year forward price is $1.3000/. a) Do these prices and rates suggest an arbitrage opportunity? (show why or why not provide a numerical justification for your answer and explain what that numerical justification means)? (4 points) b) If there is an arbitrage opportunity, include all of the necessary transactions and cash flows to exploit the opportunity (assume you borrow 100 units of a currency to start CIA) (8 points) Suppose 1-year interest rates are 8% per annum in the US and 5% per annum in France, and that the spot exchange rate is $1.2500/. The 1 -year forward price is $1.3000/. a) Do these prices and rates suggest an arbitrage opportunity? (show why or why not provide a numerical justification for your answer and explain what that numerical justification means)? (4 points) b) If there is an arbitrage opportunity, include all of the necessary transactions and cash flows to exploit the opportunity (assume you borrow 100 units of a currency to start CIA) (8 points)
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