Solution-6-month british interest rate

6-month british interest rate

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Reference no: EM133069549

You are working on the trading desk at an investment bank. You have the following prices available to you:

Spot dollar/pound Exchange Rate: 1.5943 $/£ (1£=1.5943$) 6-month Forward dollar/pound Rate 1.5857 $/£ The 6-month US (dollar) risk-free rate is 1.25%.

(Interest rates are quoted in annualized, continuously-compounded form.)

If there are no transaction costs, and you can either buy or sell at these exchange rates and borrow or lend at these interest rates, what must the 6-month British (pound) interest rate (annualized, c.c.) be for there to be no arbitrage?
Under the same assumptions, suppose that the annualized, continuously-compounded 6-month sterling interest rate is 3.5%. Describe exactly what transactions you would undertake at these prices/rates to lock in an arbitrage profit.

Now suppose the British rate is the one you calculated in (a) and that there is a 10 basis point (0.1%) bid/ask spread around both that rate and the U.S. rate

Reference no: EM133069549

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6-month british interest rate

Reference no: EM133069549

Reference no: EM133069549

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