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:

Expenses

Costs that are incurred during the operation of a business, leading to the outflow of resources or money.

Average Rate

Typically refers to the mean value of a set of rates (e.g., interest rates, exchange rates) over a specific period of time.

Average Investment

The mean value of investments over a certain period of time, often used to measure the performance of an investment portfolio.

Annual Income

The total amount of money earned in one year from all sources before taxes and other deductions.