Question
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded.
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a) Calculate the futures price of the British Pound in USD for delivery in six months.
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b) Given the same spot rate and the same British Pound risk-free rate, calculate the
implied annual risk-free rate in USD if the price of the equity futures contract in a)
is 1.245.
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c) How would an investor construct a portfolio to earn this rate of return?
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Contemporary Financial Management
Authors: R. Charles Moyer, William J. Kretlow, James R. Mcguigan
8th Edition
0324065914, 9780324065916
