Calculate the amount of profit

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(i) If three-month forward exchange rate of one pound to the US dollar (i.e. F1/4($/£)) is $1.6025 and three-month expected spot exchange rate of one pound to the US dollar (i.e. S1/4($/£)) is $1.6125, is there an arbitrage profit opportunity? Explain your answer.

(ii) If there is an arbitrage profit opportunity, then describe the strategy that you will use to realise the profit and calculate the amount of profit that you will realise on a transaction of £250,000.

Reference no: EM132435669

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