What must the six-month forward rate be to prevent arbitrage

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Reference no: EM131897763

Assume that 90-day U.S. securities have a 4.5% annualized interest rate, whereas 90-day Swiss securities have a 5% annualized interest rate. In the spot market, 1 U.S. dollar can be exchanged for 1.2 Swiss francs. The 90-day forward rate is 1.22 Swiss francs per 1 U.S. dollar.

a. Is there an arbitrage opportunity? If so, how would you exploit it?

b. What must the six-month forward rate be to prevent arbitrage?

Please show your work.

Reference no: EM131897763

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