Question

Suppose that USD/sterling spot and forward exchange rates are as follows: Spot 1.5580 90-day forward 1.5556...

Suppose that USD/sterling spot and forward exchange rates are as follows:

Spot 1.5580

90-day forward 1.5556

180-day forward 1.5518

What opportunities are open to an arbitrageur in the following situations?

(a) A 180-day European call option to buy £1 for $1.52 costs 2 cents.

(b) A 90-day European put option to sell £1 for $1.59 costs 2 cents.

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