Suppose You Observe the Following One-Year Interest Rates,spot Exchange Rates

question 53

Multiple Choice

Suppose you observe the following one-year interest rates,spot exchange rates and futures prices.Futures contracts are available on €10,000.How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? $\begin{array}{l}\begin{aligned}& \text { Exchange Rate } &\text { Interest Rate }\\\mathrm{S}_{0}(\$ / €) & \$ 1.45=€ 1.00 \\\mathrm{F}_{360}(\$ / €) & \$ 1.4=€ 1.00\end{aligned}\begin{array}{l}\mathrm{APR} \\i \$ 4 \% \\i € 3 \%\end{array}\end{array}$

• A)$159.22
• B)$153.10
• C)$439.42
• D)none of the options

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Definitions:

Autarky

This is a situation where a country or region is self-sufficient and does not engage in international trade with other countries.

Employee Retirement Income Security Act

A federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.

Vesting Rights

Are guaranteed rights to receive pension benefits.

Pension Plans

Retirement savings plans offered by employers, providing employees with a specific monthly income upon retirement.