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Determine whether an arbitrage opportunity is possible and

Question: Assume that you can borrow up to $1,000 or £800 and you observe the following:

Spot exchange rate S($/£) = $1.25/£

360-day forward rate F360($/£) = $1.40/£

U.S. discount rate i$ = 3%

British discount rate i£ = 1%

Determine whether an arbitrage opportunity is possible, and the arbitrage profit in dollars in such case. Clearly indicate the steps you would take to realize the arbitrage profit.

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Finance Basics: Determine whether an arbitrage opportunity is possible and

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