Calculate the correct forward exchange rate

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The spot exchange rate is HKD 1.00 = YEN 15.00. Interest rates in Hong Kong and Japan are 6% and 2% respectively. Both rates are continuously compounded.

a) Calculate the correct forward exchange rate with delivery in one year.

b) Explain how you would capture an arbitrage profit if the quoted one-year forward rate was HKD 1.00 = YEN 13.00.

c) Explain how you would capture an arbitrage profit if the quoted one-year forward rate was HKD 1.00 = YEN 16.00. In answering part b and c, assume that you enter a forward contract covering YEN 1,000.

Reference no: EM132645140

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