Suppose that the spot rate for British pounds is $1.76. The USA risk-free rate is 1.1% and the UK risk-free rate is 2.2%
Posted: Thu May 26, 2022 7:58 am
Suppose that the spot rate for British pounds is $1.76. The USA
risk-free rate is 1.1% and the UK risk-free rate is 2.2%; both are
compounded annually. One-year forward contracts are currently
quoted at a rate of $1.75.
6.3 Identify a strategy with which a trader can earn a profit at
no risk by engaging in a forward contract, regardless of her view
of the pound’s likely movements. Assume the trader’s domestic
currency is US dollars.
6.3.1 Describe carefully the transactions the trader would make.
[5]
6.3.2 Calculate the rate of return that would be earned from
this transaction. [2]
6.4 Suppose the trader simply shorted the forward contract. It
is now one month later. Assume interest rates are the same, but the
spot rate is now $1.72. What is the gain or loss to the
counterparty on the trader?
risk-free rate is 1.1% and the UK risk-free rate is 2.2%; both are
compounded annually. One-year forward contracts are currently
quoted at a rate of $1.75.
6.3 Identify a strategy with which a trader can earn a profit at
no risk by engaging in a forward contract, regardless of her view
of the pound’s likely movements. Assume the trader’s domestic
currency is US dollars.
6.3.1 Describe carefully the transactions the trader would make.
[5]
6.3.2 Calculate the rate of return that would be earned from
this transaction. [2]
6.4 Suppose the trader simply shorted the forward contract. It
is now one month later. Assume interest rates are the same, but the
spot rate is now $1.72. What is the gain or loss to the
counterparty on the trader?