he current exchange rate from dollars to British pounds is 1.03 ($/pound). The current dollar denominated continuously compounded risk-free rate 4% and you observe the current pound forward contract with 3 years to maturity to have a forward price of $1.11 . a. What is the implied pound denominated risk-free rate? b. If the actual pound denominated risk-free rate is 0%, how would you create an arbitrage opportunity? c. What is the arbitrage profit from your strategy in part

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter4: Exchange Rate Determination
Section: Chapter Questions
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The current exchange rate from dollars to British pounds is 1.03 ($/pound). The current dollar denominated continuously compounded risk-free rate 4% and you observe the current pound forward contract with 3 years to maturity to have a forward price of $1.11

.
a. What is the implied pound denominated risk-free rate?


b. If the actual pound denominated risk-free rate is 0%, how would you create an arbitrage opportunity?


c. What is the arbitrage profit from your strategy in part b?

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