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Suppose 180-day interest rates are 6.5% per annum in the US and 3.5% per annum in...

Suppose 180-day interest rates are 6.5% per annum in the US and 3.5% per annum in France, and that the spot exchange rate is $1.1500/€. The 180-day forward price is $1.1400/€.   

a. Do these prices and rates suggest an arbitrage opportunity? (show why or why not – provide a numerical justification for your answer and explain what that numerical justification means)? (5 points)

b. If there is an arbitrage opportunity, include all of the necessary transactions and cash flows to exploit the opportunity (assume you start your strategy by borrowing 100 units of a currency) (8 points)

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 2 years ago
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