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Q.1 The spot rate of British pound is quoted at $1.4900. The 90-day forward rate

ID: 2753152 • Letter: Q

Question

Q.1 The spot rate of British pound is quoted at $1.4900. The 90-day forward rate exhibits an 2% discount on an annual basis. What is the 90-day forward rate of the pound?

Q.2 Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?

Explanation / Answer

1)

90-Day forward rate:

= $1.4900×(1-2%×90÷365)

= $1.4823

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