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Suppose that the three-month interest rates in Norway and the US are, respectively, 8% and 4%. Suppose that the spot price of the Norwegian Kroner
Suppose that the three-month interest rates in Norway and the US are, respectively, 8% and 4%. Suppose that the spot price of the Norwegian Kroner is $0.155.Sell spot at 0.155 e0.083/12 = $0.1519.
Invest PV(1 Kroner) for three months. Amount received at maturity = 1 Kroner.
Borrow $0.1519 for three months at 4%.
After three months, deliver Kroner and receive $0.156 from the forward.
Repay dollar borrowing with interest for a total of $0.1534.
Question: Why requires to calculate the PV which is 0.1519, if we would like to get 1 kroner, shouldn't it be following the current spot rate which is 0.155?
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