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Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.95 and Kr 6.03, respectively. The annual risk-free rate in the United

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.95 and Kr 6.03,

respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 percent.

a. Is there an arbitrage opportunity here? Why?

b. From question a, how can we exploit the arbitrage opportunity if it exists?

c. What must the six-month forward rate be to prevent arbitrage?

Useful formulas: Ft = S0 [1 + (RFC - RUS)]t

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