The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K. Introduction: Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

Question

Want to see the full answer?

Answer 1

Question

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.

Assume the spot price of the British pound is currently $1.65. If the risk-free interest rate on 1-year government bonds is 4.5% in the United States and 6.3% in the United Kingdom, what must be the forward price of the pound for delivery 1 year from now? (Round your answer to 3 decimal places. Omit the "$" sign in your response.) Forward price

Suppose the spot price of the British pound is currently $1.50. If the risk-free interest rate on one-year government bonds is 4% in the United States and 3% in the United Kingdom, what must the forward price of the pound be for delivery one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 2

Question

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 3

Question

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 4

Question

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 5

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Answer 6

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

Answer 7

Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

Answer 8

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Answer 9

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Answer 10

Expert Solution & Answer

Answer 11

Expert Solution & Answer

Answer 12

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 13

Ch. 23 - Prob. 1PS Ch. 23 - Prob. 2PS Ch. 23 - Prob. 3PS Ch. 23 - Prob. 4PS Ch. 23 - Prob. 5PS Ch. 23 - Prob. 6PS Ch. 23 - Prob. 7PS Ch. 23 - Prob. 8PS Ch. 23 - Prob. 9PS Ch. 23 - Prob. 10PS

Solution Summary: The author calculates the forward price of the pound for the one-year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in UK.

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Want to see the full answer?

Chapter 23 Solutions

Solution Summary: The author calculates the forward price of the pound for the one-year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in UK.

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example. Introduction: Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.

Want to see the full answer?

Chapter 23 Solutions

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.