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Problem 8. On the Forex market, you observe the following hypothetical quotes: Spot rate: :$= 1.10 One-year interest rate in the UK = 0.5%
Problem 8. On the Forex market, you observe the following hypothetical quotes: Spot rate: :$= 1.10 One-year interest rate in the UK = 0.5% One-year interest rate in US = 0.25%. Suppose the one-year forward :$ exchange rate quoted by JP Morgan is 1.12. Is there an arbitrage opportunity? If there is was an arbitrage opportunity, what steps would you have taken to make an arbitrage profit, and how much would you have profited with $1 million invested for this purpose?
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