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In: Finance

Suppose that you don't have any money. Assume that the spot exchange rate between the U.S....

Suppose that you don't have any money. Assume that the spot exchange rate between the U.S. dollar and euro is S0($1.08/€), and the six-month U.S. and EU risk-free interest rates are 2% and 6% respectively (both rates are continuously compounding). Assume that the six month forward exchange rate is (F0 6month ($1.00/€)).

a. How can you make a profit from this situation? Please clearly explain your strategy and show your calculations.

b. At what six-month forward rate are profits at zero?

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Expert Solution

jeff jeffy answered 1 year ago
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