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You have the following market data. Spot price of the British pound is $1.5720. The underlying asset for the British pound futures contract is 62,500
You have the following market data.
- Spot price of the British pound is $1.5720.
- The underlying asset for the British pound futures contract is 62,500 pounds.
- 3-month British LIBOR rate is 1.38% per year, and 3-month U.S. LIBOR rate is 0.50% per year. Both rates are continuously compounded.
- British pound futures contract that expires in 3 months has a futures price of $1.5713.
What is the general arbitrage strategy?
A. Take a long position in the futures contract, borrow pounds at the British risk-free rate, sell pounds in the spot market, and invest the sales proceeds at the U.S. risk-free rate. |
B. Take a short position in the futures contract, buy pounds in the spot market, borrow at the U.S. risk-free rate to finance the purchase, and invest pounds at the British risk-free rate. |
C. Take a long position in the futures contract, buy pounds in the spot market, borrow at the U.S. risk-free rate to finance the purchase, and invest pounds at the British risk-free rate. |
D. Take a short position in the futures contract, borrow pounds at the British risk-free rate, sell short pounds in the spot market, and invest the sales proceeds at the U.S. risk-free rate. |
E. No arbitrage opportunity currently exists. |
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