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Suppose the current spot rate is 1.59 $/£, the 1-year Europound rate is 2.01%, and the 1-year Eurodollar rate is 1.42%.
a) What is the implied 1-year forward rate?
b) If the quoted 1-year forward rate is 1.57 $/£ and you are a currency trader seeing these quotes, can you make some money? If no, please explain why not. If yes, specify each transaction necessary and calculate your final profit (answers like buying or selling “at the implied forward rate” calculated in Part a) are not acceptable—you need to specify the original, executable transactions).
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