0. If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 6 percent, the spot exchange rate is $1.3267/1, and interest rate parity holds, what must be the one-year forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g.. 32.1616)) One-year forward exchange rate per £ b. If the forward rate is actually $1.3037/£1, would you borrow in dollars or pounds to make an arbitrage profit? O Dollars O Pounds C. If you can borrow either $1 million or £1 million (borrow in currency identified in previous part) to capitalize on the arbitrage profit using the actual forward rate of $1.3037/£1, what is your arbitrage profit at the end of the year expressed in $dollars?" (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) Arbitrage profit in $

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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IRP Arbitrage

**a.**
If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 6 percent, the spot exchange rate is $1.3267/£1, and interest rate parity holds, what must be the one-year forward exchange rate? *(Do not round intermediate calculations. Round your answer to 4 decimal places. e.g., 32.1616)*

One-year forward exchange rate: $ ___ per £

**b.**
If the forward rate is actually $1.3037/£1, would you borrow in dollars or pounds to make an arbitrage profit?
- ○ Dollars
- ○ Pounds

**c.**
If you can borrow either $1 million or £1 million (borrow in currency identified in previous part) to capitalize on the arbitrage profit using the actual forward rate of $1.3037/£1, what is your arbitrage profit at the end of the year expressed in $dollars? *(Do not round intermediate calculations. Round your answer to 4 decimal places. e.g., 32.1616)*

Arbitrage profit in $ ___
Transcribed Image Text:IRP Arbitrage **a.** If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 6 percent, the spot exchange rate is $1.3267/£1, and interest rate parity holds, what must be the one-year forward exchange rate? *(Do not round intermediate calculations. Round your answer to 4 decimal places. e.g., 32.1616)* One-year forward exchange rate: $ ___ per £ **b.** If the forward rate is actually $1.3037/£1, would you borrow in dollars or pounds to make an arbitrage profit? - ○ Dollars - ○ Pounds **c.** If you can borrow either $1 million or £1 million (borrow in currency identified in previous part) to capitalize on the arbitrage profit using the actual forward rate of $1.3037/£1, what is your arbitrage profit at the end of the year expressed in $dollars? *(Do not round intermediate calculations. Round your answer to 4 decimal places. e.g., 32.1616)* Arbitrage profit in $ ___
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