In: Finance
How much is your arbitrage profit in Euros at expiration, if you know that the current exchange rate is Euro 1.2 / GBP, the 60-day forward rate is Euro 1.15 /GBP, the risk free rate in Europe is 2% and the risk free rate in the UK is 3.6%? Make your calculation so that the spot transaction is for GBP 500,000.
Answer is 23,603.66 please provide detailed solution
As per Interest rate parity:
As per Interest rate parity the difference in spot fate and forward rate exits due to differences in interest rate between two countries.
F/S = (1+ra)/(1+rb)
F= forward rate
S = spot rate.
ra = interest rate of price currency.
rb= interest rate of base currency.
If the above equation does not hold good then there is a chance of Arbitrage.
Answer: 23,478.26 (rounding off errors from your answer).
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