Show the arbitrage profits that you can make

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Reference no: EM132198528

Question - Using the prices (EUR/USD 3 month future = 1.1586), evaluate the 3 month price for arbitrage in the EUR/USD futures contract. Assume the risk-free rate in the U.S. is 2.5% (annualized) and the risk-free rate in Europe is -1% (annualized).

(a) Show the arbitrage profits that you can make with one contract (125,000 euros)

(b) Show that you earn the same profits as (a) if price of the EUR/USD = $1.10 on the street in three months as you would if the EUR/USD = $1.50 on the street.

Reference no: EM132198528

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