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Suppose that USD/sterling spot and forward exchange rates are as follows: Spot 1.5580
Chapter 1, Problem 1.25(choose chapter or problem)
QUESTION:
Suppose that USD/sterling spot and forward exchange rates are as follows: Spot 1.5580 90-day forward 1.5556 180-day forward 1.5518 What opportunities are open to an arbitrageur in the following situations? (a) A 180-day European call option to buy 1 for $1.42 costs 2 cents. (b) A 90-day European put option to sell 1 for $1.49 costs 2 cents.
Questions & Answers
QUESTION:
Suppose that USD/sterling spot and forward exchange rates are as follows: Spot 1.5580 90-day forward 1.5556 180-day forward 1.5518 What opportunities are open to an arbitrageur in the following situations? (a) A 180-day European call option to buy 1 for $1.42 costs 2 cents. (b) A 90-day European put option to sell 1 for $1.49 costs 2 cents.
ANSWER:a) In this scenario, an arbitrageur would purchase the 180-day European call option and sell spot to purchase 180-day forward and sell it for a profit. The arbitrageur would buy 1 USD for $1.42 at a cost o