Suppose the spot and six-month forward rates on the South Korean won are SKW 1,3

Question

Suppose the spot and six-month forward rates on the South Korean won are SKW 1,304.93 and SKW 1,314.92, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in South Korea is 7 percent. (Enter your answer as directed, but do not round intermediate calculations.)

What must the six-month forward rate be to prevent arbitrage? (Do not include the South Korean won sign (SKW). Round your answer to 4 decimal places (e.g., 32.1616).)

Suppose the spot and six-month forward rates on the South Korean won are SKW 1,304.93 and SKW 1,314.92, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in South Korea is 7 percent. (Enter your answer as directed, but do not round intermediate calculations.)

Explanation / Answer

Spot Rate : 1304.93

6 Month forward rate : 1314.92

Risk free return in Korea = 7%

fair value after 6 Month = Spot rate = Spot rate*r*6/12

= 1304.92*7%*6/12 = 1304.93 + 45.67 = 1350.60

hence KRW is undervalued in market because fair value is greater then forward rate in market

1350.60 > 1314.92

hence arbitrator is buy krw in future market

hence arbitrator will buy at 1314.92 & sell after 6 month when KRW rate is near about fair value then he sold.

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