You have $10,000 to invest for 90 days. Current spot rate: $1.32/£. The 90-day forward rate is $1.38/£. 90-day interest rate in US is 1.5% and 90-day interest rate in UK is 2.5%. Do we have an arbitrage opportunity? How much can you make?

You have $10,000 to invest for 90 days. Current spot rate: $1.32/£. The 90-day forward rate is $1.38/£. 90-day interest rate in US is 1.5% and 90-day interest rate in UK is 2.5%. Do we have an arbitrage opportunity? How much can you make?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

You have $10,000 to invest for 90 days. Current spot rate: $1.32/£. The 90-day forward rate is $1.38/£. 90-day interest rate
in US is 1.5% and 90-day interest rate in UK is 2.5%. Do we have an arbitrage opportunity? How much can you make?

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