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Suppose that the spot and forward (future) NZD USD exchange rates (both buy and sell) are as follows Spot 1 NZD USD 0.7000 90 day
Suppose that the spot and forward (future) NZD USD exchange rates (both buy and sell) are as follows Spot 1 NZD USD 0.7000 90 day forward 1 NZD = USD 0.6850 What opportunities are open to the arbitrageur if a 90-day European call option to buy 1 NZD for USD 0.6725 costs USD 0.0105? NOTE: Your arbitrage strategy must include buying or selling this option Assume: (i) Interest rates (both borrowing and lending) in USD are 0.00% p.a (ii) The 90-day European call option expires on the same day as settlement of the 90-day forward contract Show any arbitrage opportunity in USD for a full range of possible terminal spot rates at the end of 90 days when the option and the 90 day forward contract is assumed to expire. Ignore any margin requirement or transactions costs (other than the option cost) to exploit any arbitrage strategy
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