Which of the Following Is True If One Year Forward

question 4

Multiple Choice

Which of the following is true if one year forward rate is F = 1.83$/£; current spot rate is S = 1.81$/£; and interest rates are i = 3.5%,and i* = 3% (where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.) ?

• A) Arbitrage is not possible
• B) Arbitrage is possible and arbitrage strategy involves buying £ forwards
• C) Arbitrage is possible and arbitrage strategy involves selling £ forwards
• D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

---

Definitions:

Z-Score

Another term for standard score, indicating the number of standard deviations a data point is from the mean of its distribution.

Standard Deviations

A statistical measure that quantifies the amount of variation or dispersion of a set of data values.

Standard Normal Distribution

A bell-shaped probability distribution characterized by a mean of zero and a standard deviation of one, used in many areas of statistical analysis.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in a data set vary from the mean.