Ve observe Fo> Sera-), where Fo is the direct forward exchange rate, Ta is the domestic risk-free rate, ry is the foreign riskfree rate, 7 is the maturity of the forward contract, So is the direct spot exchange rate. Choose an action from below to arbitrage: O At time 0, we convert the foreign currency we borrowed into domestic currency. At time 0, borrow 1000 foreign currency at r, for T. O Long forward: buy the foreign currency at Tat F, using domestic currency received from the domestic bank. O At time 0, borrow 1000 domestic currency at r for T.
Ve observe Fo> Sera-), where Fo is the direct forward exchange rate, Ta is the domestic risk-free rate, ry is the foreign riskfree rate, 7 is the maturity of the forward contract, So is the direct spot exchange rate. Choose an action from below to arbitrage: O At time 0, we convert the foreign currency we borrowed into domestic currency. At time 0, borrow 1000 foreign currency at r, for T. O Long forward: buy the foreign currency at Tat F, using domestic currency received from the domestic bank. O At time 0, borrow 1000 domestic currency at r for T.
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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Transcribed Image Text:We observe Fo> Soera-r), where Fo is the direct forward exchange rate, "a is the domestic risk-free rate, ry is the foreign riskfree rate, T is the maturity of the forward contract, So is the direct spot exchange rate.
Choose an action from below to arbitrage:
O At time 0, we convert the foreign currency we borrowed into domestic currency.
O At time 0, borrow 1000 foreign currency atr, for T.
O Long forward: buy the foreign currency at T at F, using domestic currency received from the domestic bank.
O At time 0, borrow 1000 domestic currency at r for T.
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