Arbitrate profits and calculate the arbitrage profits

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The spot rate for the £ is 1.33 US$ per £.

The $ is currently selling at a 10% forward discount.

The six-month interest rate in the US is 3%.

What should be the interest rate in the UK to ensure that the markets are in equilibrium?

Show that the no-arbitrage condition holds by creating and comparing the returns on alternative investments available to an investor based in the UK.

Suppose the interest rate on the US$ changes to 4%. Using the UK interest rate you have estimated, show the transactions that will yield arbitrate profits and calculate the arbitrage profits.

Reference no: EM132432770

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