The forward price of a currency is given by f(S, t) = S e^(rrf ) (T t) ,

a) Show that if f(S, t) < S e(rrf ) (T t) , then arbitrage profits can be made. Hint: because f(S, t) is too low and S is too high, todays arbitrage trades are

i) Enter a long position in the forward contract. (That is, agree to buy the foreign currency at time T at the price f(S, t) per unit of foreign currency.)

ii) Borrow one unit of the foreign currency at the rate rf for the period from t to T, and sell the foreign currency for S and invest S at the home rate r, for the period from t to T.