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How much arbitrage profit you can make

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Reference no: EM133034200

Problem - The spot rate, today, is €1.06/£ and the interest rate in the UK is 5% per annum and the interest rate in Eurozone is 8% per annum. (Assume UK. as the home country)

a. If Interest Rate Parity (IRP) holds, what is the one-year forward rate?

b. If the one-year forward rate is €1.30/£, why and where (in which country) would you borrow and why and where (in which country) would you invest? Explain you answer.

c. If the one-year forward rate is €1.30/£, how much arbitrage profit you can make, if you can borrow £1,000,000 or €1,050,000 today. Explain your answer in detail.

d. Without any calculation or referring to Interest Rate Parity, briefly discuss and explain which currency should appreciate and which currency should depreciate in one year and why?

Reference no: EM133034200

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