7. Assume the following information: $S_t = 6$ ARS/EUR $F_{t,1year} = 6.25$ ARS/EUR $i_{EUR} = 2\%$ $i_{ARS} = 7\%$ Can you (risk-free) arbitrage and make money?How?
Added by Shane L.
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The CIRP formula is: $F_t = S_t \frac{1+i_{ARS}}{1+i_{EUR}}$ Show more…
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Suppose that the exchange rate between the US dollar and the Euro is Edollar/euro = 1.3, and that you expect it to be around 1.1 in 6 months from now. Suppose also that you have 10,000 dollars and that the forward rate of dollars per euro is Fdollar/euro = 1.2. Describe in detail the arbitrage strategy that you would engage in and calculate the profits you would obtain from it. Would your decision change if you had to pay 800 dollars for signing the forward contract?
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