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6 May, 07:19

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

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  1. 6 May, 07:38
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    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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