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The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...

The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded.

a) Calculate the futures price of the British Pound in USD for delivery in six months.

b) Given the same spot rate and the same British Pound risk-free rate, calculate the

implied annual risk-free rate in USD if the price of the equity futures contract in a)

is 1.245.

c) How would an investor construct a portfolio to earn this rate of return?

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Homework Answers

Answer #1

a) Using Interest rate parity,

b)

c) Since interest rate of British pound is higher than USD which means USD is at premium. Therefore, investor should invest in Bristish pound.

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