Arbitrage forward price of the british pound

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Reference no: EM131957211

The current Dollar-Pound exchange rate is 1.60 dollars per British Pound. The U.S. and British risk-free interest rates (annualized, continuously compounded) are 5% and 7.5%, respectively. Answer the following questions.

A. What is the no arbitrage forward price of the British Pound for a 6-month forward contract?

B. Suppose the actual forward price is 1.65 dollars per British Pound. Illustrate the arbitrage opportunity.

Reference no: EM131957211

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