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2 years ago

The spot USD /GBP rate is 1.5711. The1 year t-bill rate in the US is .19%. The 1 year rate in the UK is 0.39%.

Business

1 answer:

mojhsa [17]2 years ago

8 0

Answer:

Spot USD/GBP rate = 1.5711

(a) 1 year USD/GBP forward rate:

= [Spot rate × (1 + Domestic currency interest rate)] ÷ (1 + foreign currency interest rate)

= [1.5711 × (1+0.19%)] ÷ (1 + 0.39%)

= 1.56797, which means the USD will be at a forward premium

b) The observed 1 year forward rate is 1.60 which differs from the ideal forward rate.

This means an arbitrage opportunity exists here.

c) I would sell GBP forward for 1 year @ 1.60.

This means that I will receive USD 1.60 for every 1 GBP I sell instead of 1.56797 that is the ideal deal.

This is how I would take advantage of the arbitrage opportunity.

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