Question
The spot price of the British pound is currently $1.6. The risk-free interest rate on 1- year government bonds is 0.75% in the United States
The spot price of the British pound is currently $1.6. The risk-free interest rate on 1- year government bonds is 0.75% in the United States and 1% in the United Kingdom. [Hint: use the Interest rate parity]
a. What must be the forward price of the pound for delivery 1 year from now?
b. How could an investor make risk-free arbitrage profits if the forward price was $1.65?
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International Financial Management
Authors: Cheol Eun, Bruce Resnick
5thEdition
0073382345, 9780073382340
