Question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 percent.
The six-month forward rate on the Norwegian krone would have to be Kr/$ ........... to prevent arbitrage.

Answer 1

Answer:

The six-month forward rate on the Norwegian krone would have to be Kr/$ 5.93 to prevent arbitrage

Explanation:

In order to calculate the six-month forward rate on the Norwegian krone we would have to calculate the following formula:

six-month forward rate = S (1+id) / (1+if)

According to the given data we have the following:

S=5.83

id=5.33%

if=3.63%

Therefore, six-month forward rate =5.83 (1+5.33%) / (1+3.63%)

six-month forward rate =6.14/1.04 = 5.93

The six-month forward rate on the Norwegian krone would have to be Kr/$ 5.93 to prevent arbitrage