Question

You have the following market data. A British pound futures contract expires in 12 months. The...

You have the following market data.

  • A British pound futures contract expires in 12 months.
  • The annualized, continuously compounded risk-free interest rates in Britain and the U.S. are 1.55% and 1.01%, respectively, from today until expiration.
  • The spot exchange rate between the British pound and the U.S. dollar is $1.645 per British pound.

What is the no-arbitrage futures price (expressed in U.S. dollars)?

Do not round values at intermediate steps in your calculations. Enter your answer in dollars and cents to four decimal places, but omit the $ symbol and commas. For example, enter $1,234.5678 as 1234.5678 as your answer.

Homework Answers

Answer #1

Spot rate for $ per British Pound = S($/£) = $1.645 , Period = 12 months = 1 years,

Risk free rate in Britain = RB = 1.55% p.a continuously compounded. and Risk free rate in US=RU =1.01% p.a continuously compounded, T= years to expiry = 1

No Arbitrage Future Price in $ = F($/£) = S($/£) x (eRU- RB)T

F($/£) =1.645 x (e1.01% - 1.55%)1 = 1.645 x (e1.01% - 1.55%) = 1.645 x e-0.54%   =1.645 x e-0.0054

We can find e-0.0054 by using exp function in excel

Formula to be used in excel: =exp(-0.0054)

we get e-0.0054 = 0.9946

Hence F($/£) = 1.645 x 0.9946 = 1.636117 = $1.6361

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You have the following market data. Spot price for the British pound is $1.475 per pound....
You have the following market data. Spot price for the British pound is $1.475 per pound. Futures price is $1.27 per pound on a contract that expires in four months. U.S. dollar LIBOR for four months is a continously compounded rate of 1.43% per annum. British LIBOR for four months is a continuously compounded rate of 3.41% per annum. The contract size is 62,500 British pounds. What is the total net profit if you execute the arbitrage strategy with one...
You have the following market data. The S&P 500 market index currently is 94.87. The annualized,...
You have the following market data. The S&P 500 market index currently is 94.87. The annualized, continuously compounded dividend yield on this index is 3.71%. The futures contract on this index has an index multiplier of 100. The annualized, continuously compounded risk-free rate is 3.41%. The index futures contract that expires in 5 months has a futures price of 80.32. What is the total net profit if you execute the arbitrage strategy with one futures contract? Do not round values...
You have the following market data. Spot price for the Mexican Peso is $0.060 per Peso....
You have the following market data. Spot price for the Mexican Peso is $0.060 per Peso. Futures price is $0.064 per Peso on a contract that expires in one month. U.S. dollar LIBOR for one month is a continuously compounded rate of 1.48% per annum. Mexican LIBOR for one month is a continuously compounded rate of 2.71% per annum. The contract size is 500,000 Mexican Pesos. What is the total net profit if you execute the arbitrage strategy with one...
The current Dollar-Pound exchange rate is 1.60 dollars per British Pound. The U.S. and British risk-free...
The current Dollar-Pound exchange rate is 1.60 dollars per British Pound. The U.S. and British risk-free interest rates (annualized, continuously compounded) are 5% and 7.5%, respectively. Answer the following questions. A. What is the no arbitrage forward price of the British Pound for a 6-month forward contract? B. Suppose the actual forward price is 1.65 dollars per British Pound. Illustrate the arbitrage opportunity.
Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend...
Suppose that an Intel single-stock futures contract expires in four months. The stock pays a dividend in two months. We have the following information. Annualized, continuously compounded risk-free interest rate for 2-month period: r = 3.4%. Annualized, continuously compounded risk-free interest rate for 4-month period: r = 6.96%. Current spot price of Intel stock: $29 per share. Dividend per share of $0.38 in two months. What must the futures price equal in order than no arbitrage opportunity exist?
You have the following market data. Spot price for the Euro is $1.174 per Euro. Three-month...
You have the following market data. Spot price for the Euro is $1.174 per Euro. Three-month forward price is $1.06 per Euro. U.S. dollar LIBOR for three months is a continously compounded rate of 1.26% per annum. Euro LIBOR for three months is a continuously compounded rate of 3.98% per annum. Underlying asset for this contract (i.e., the quantity of Euros to be delivered in three months) is 100,000 Euros. What is the total net profit if you execute the...
You have the following market data. Spot price for the Swiss Franc is $1.156 per Franc....
You have the following market data. Spot price for the Swiss Franc is $1.156 per Franc. Two-month forward price is $1.22 per Franc. U.S. dollar LIBOR for two months is a continously compounded rate of 1.75% per annum. Swiss LIBOR for two months is a continuously compounded rate of 2.05% per annum. Underlying asset for this contract (i.e., the quantity of Swiss Francs to be delivered in two months) is 500,000 Swiss Francs. What is the total net profit if...
You have the following market data. Spot price for the Mexican Peso is $0.054 per Peso....
You have the following market data. Spot price for the Mexican Peso is $0.054 per Peso. Futures price is $0.069 per Peso on a contract that expires in one month. U.S. dollar LIBOR for four months is a continously compounded rate of 2.7% per annum. British LIBOR for four months is a continuously compounded rate of 2.45% per annum. The contract size is 500,000 Mexican Pesos. What is the total net profit if you execute the arbitrage strategy with one...
The three-month futures price for the British pound is $1.2890/₤. You expect the spot price three...
The three-month futures price for the British pound is $1.2890/₤. You expect the spot price three months from today to be $1.2560/₤. The British pound contract size is ₤62,500. 1.) If you are a speculator would you buy the futures contracts or sell them. Explain your answer. 2.) How much profit would you make if you trade 25 contracts and the expectations come true? 3.) If you were a MNC with A/R of ₤5 million due in three months, would...
You have the following market data. Spot price of the Japanese Yen is $0.009185. Underlying asset...
You have the following market data. Spot price of the Japanese Yen is $0.009185. Underlying asset for the Japanese Yen futures contract is 12,500,000 Yen. 3-month Japanese LIBOR rate is 2.14% per year, and the 3-month U.S. LIBOR rate is 2.76% per year. Both rates are continuously compounded. Japanese Yen futures contract that expires in 3 months has a futures price of $0.009030. What is the general arbitrage strategy? A. Take a short position in the futures contract, borrow yen...