a. You notice that the 9-month risk free interest rates in the UK is 4% per annum with continuous compounding and the US rate is 7% per annum, with continuous compounding. The spot price of the Pound Sterling is $0.2500. Assume the US is your home country. Answer the following: i. What is the no-arbitrage price of the 9-month futures contract? ii. You observe that the 9-month futures price in the market is $0.2775. State why an arbitrage opportunity exists and explain how you would take advantage of this arbitrage opportunity. (Hint: Your answer should include your general strategy in broad terms and your step-bystep approach to exploiting the arbitrage opportunity using numbers from this question)
a. You notice that the 9-month risk free interest rates in the UK is 4% per annum with continuous compounding and the US rate is 7% per annum, with continuous compounding. The spot price of the Pound Sterling is $0.2500. Assume the US is your home country. Answer the following: i. What is the no-arbitrage price of the 9-month futures contract? ii. You observe that the 9-month futures price in the market is $0.2775. State why an arbitrage opportunity exists and explain how you would take advantage of this arbitrage opportunity. (Hint: Your answer should include your general strategy in broad terms and your step-bystep approach to exploiting the arbitrage opportunity using numbers from this question)
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
Section: Chapter Questions
Problem 1PS
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a. You notice that the 9-month risk free interest rates in the UK is 4% per annum with
continuous compounding and the US rate is 7% per annum, with continuous compounding.
The spot price of the Pound Sterling is $0.2500. Assume the US is your home country.
Answer the following:
i. What is the no-arbitrage price of the 9-month futures contract?
ii. You observe that the 9-month futures price in the market is $0.2775. State why an
arbitrage opportunity exists and explain how you would take advantage of this
arbitrage opportunity.
(Hint: Your answer should include your general strategy in broad terms and your step-bystep approach to exploiting the arbitrage opportunity using numbers from this question)
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