1. Suppose you have the following spot exchange rates:
£1 = $1.57, euro 1 = $1.23, and £1 = euro 1.25.
i) Please check if the cross rate between the euro and the UK pound (£) is consistent or not.
ii) How much profit (in $ terms) could you make from trading $1,000? Describe your trading process to get your profit.
2. You purchased a European foreign exchange option contract to buy 5000 UK pound at the price of $1.66/£ which expires today. You have paid $250 for the contract. Suppose the spot rate on the expiration date, today, is $1.69/£, what will be your optimal decision for the contract (exercise or not exercise)?
3. The recent market data on the U.S. and UK are shown as:
the spot rate of the UK pound $1.55/£
the 90-day forward rate $1.57/£
the 180-day forward rate $1.58/£
your expected future spot rate in 3 months $1.56/£
your expected future spot rate in 6 months $1.59/£
interest rate (TB) in the U.S.: 4% (per year)
interest rate (TB) in the UK.: 2% (per year)
If you have $1 million available for 3 months, where do you want to invest (assume no transaction costs)?