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Nutka1998 [239]
3 years ago
10

Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange r

ate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs
Business
1 answer:
gizmo_the_mogwai [7]3 years ago
4 0

Answer:

The futures price of the pound for a one-year contract be to prevent arbitrage opportunities would be $1.63/BP.

Explanation:

In order to calculate the the futures price of the pound for a one-year contract be to prevent arbitrage opportunities we would have to make the following calculation:

futures price of the pound for a one-year contract=Spot rate*(1+United Kingdom risk free rate)/(1+United States risk free rate)

futures price of the pound for a one-year contract=$1.60/BP*(1+6%)/(1+4%)

futures price of the pound for a one-year contract=$1.63/BP

The futures price of the pound for a one-year contract be to prevent arbitrage opportunities would be $1.63/BP.

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Key Points

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