Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Problem 20-10 Exchange Rates and Arbitrage Suppose the spot and 180-day forward

ID: 2795220 • Letter: P

Question

Problem 20-10 Exchange Rates and Arbitrage

Suppose the spot and 180-day forward rates on the Norwegian krone are Kr 5.82 and Kr 5.97, respectively. The annual risk-free rate in the United States is 3.62 percent, and the annual risk-free rate in Norway is 5.32 percent.

  

The 180-day forward rate on the Norwegian krone would have to be Kr/$  to prevent arbitrage. (Do not round intermediate calculations and round your final answer to 4 decimal places (e.g., 32.1616).)

Suppose the spot and 180-day forward rates on the Norwegian krone are Kr 5.82 and Kr 5.97, respectively. The annual risk-free rate in the United States is 3.62 percent, and the annual risk-free rate in Norway is 5.32 percent.

Explanation / Answer

Problem 20-10:Exchange Rates and Arbitrage

F = S (1+id) / (1+if)

where,

F = Forward Rate,

S = Spot Rate,

id = Interest rate in domestic country,

id = Interest rate in foreign country.

F = 5.82 (1+5.32%) / (1+3.62%)

   = 5.82 (1.0532) / 1.0362
   = 6.1296 / 1.0362
   = 5.9155

The 180-day forward rate on the Norwegian krone would have to be Kr/$ 5.9155 to prevent arbitrage.Round off to Kr/$ 5.92

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote