Answer to Question #230061 in Economics for hyatt

Question

Refer the following information:

Spot Rate of £ = $1.39, 90-day forward rate of £ = $1.47

180-day British Interest Rate = 4%, 180-day US Interest Rate = 3%

Explain how an arbitrageur can design a strategy?

Answer 1

you take a loan in dollars for 90 days and conclude a forward contract, exchange them for pounds sterling, put them on a deposit in an English bank for 90 days, exchange them at the forward rate for dollars.

$1.39*1.015=1.41$1.41$ must return

$1*1.02*1.47=1.5$ $ will get