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The US dollar and British pound interest rates for three months are 6.00% and 5.00%, respectively. The spot exchange rate is $1.2000 per pound. The
The US dollar and British pound interest rates for three months are 6.00% and 5.00%, respectively. The spot exchange rate is $1.2000 per pound. The fivemonth forward is priced by the market at $1.2571 per pound. What should the five-month forward be priced at? Show how you can make a risk-free profit from this situation, using a notional amount of US$1,000,000 (or equivalent in pounds) to illustrate your answer.
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