Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.
Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter6: Managing In The Global Economy
Section: Chapter Questions
Problem 12E
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Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%.
There are three 6-month forward contracts available, with the following exchange rates:
Contract |
A |
B |
C |
EUR/GBP |
0.86 |
0.85 |
0.90 |
Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.
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