the annualized risk-free rate in the eurozone is 5% and the annualized UK risk-free rate is...

the annualized risk-free rate in the eurozone is 5% and the annualized UK risk-free rate is 3%. The spot quote is €1.18/£ while the one year forward quote is €1.25/£. You can borrow either €1,000,000 or £847,457.6.

According to interest rate parity, is the forward quote correct? If not, what should it be?

If the forward quote is not correct, how much money would you profit if you implemented the proper arbitrage?

Multiple Choice

Forward rate should be €1.2643/£; arbitrage would net you €110,513
Forward rate should be €1.2643/£; arbitrage would net you €93,786
Forward rate should be €1.2029/£; arbitrage would net you €41,102
Forward rate should be €1.2029/£; arbitrage would net you €45,721
Forward rate should be €1.2029/£; arbitrage would net you €51,354

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Expert Solution

jeff jeffy answered 1 year ago

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