Chapter 23, Problem 11PS

a.

Summary Introduction

To compute: The forward price of the pound for the one year delivery when the risk-free interest rate on 1-year government bonds is 1% in U.S. and 2% in U.K.

Introduction:

Forward exchange rate: The currency values of different countries differ. But when a trade takes place, there will transactions between the countries. So, the banks will face a problem in calculating the value of transactions. This is where the forward exchange rate plays a major role. Forward exchange rate is nothing but an agreement to which the bank accepted to exchange the currency for another at a future date. This happens when it deal into a future contract with the investor.

b.

Summary Introduction

To evaluate:The possible way available to investor to make risk-free arbitrage profits if the forward price is higher with the help of a example.

Introduction:

Arbitrage profit: It is the profit earned by exploiting the prices differences of securities in similar or different market.