Question
Use the information below to answer the following question. (7 points) Exchange Rate Interest Rate APR S 0($/) $ 1.45 = 1.00 i $ 7
Use the information below to answer the following question. (7 points)
|
|
| Exchange Rate |
| Interest Rate |
| APR |
| ||||||||
| S0($/) |
| $ | 1.45 |
| = | 1.00 |
|
| i$ |
|
| 7 | % | ||
| F360($/) |
| $ | 1.49 |
| = | 1.00 |
|
| i |
|
| 5 | % | ||
1) Compute one-year forward exchange rate (i.e., F360($/)) by using interest rate parity.
2) Do you think whether there is an arbitrage opportunity. If yes, propose the trading strategy and compute the arbitrage profits (suppose that the notional principal is $100 or 68.9655).
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International Finance Theory And Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc Melitz
11th Global Edition
1292238739, 978-1292238739
