compounding are different for investors so that re< Tb. Show that the no-arbitrage forward price F(0, T) satisfies Soerer ≤F(0,T) ≤ Soe

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
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Suppose that the lending rate re and the borrowing rate r, under continuous
compounding are different for investors so that re < rp. Show that the no-arbitrage
forward price F(0,T) satisfies
Soe"T < F(0,T) < Soe™%T.
Transcribed Image Text:Suppose that the lending rate re and the borrowing rate r, under continuous compounding are different for investors so that re < rp. Show that the no-arbitrage forward price F(0,T) satisfies Soe"T < F(0,T) < Soe™%T.
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