Problem 1. Who are the principal users of the forward market? What are their motives?
Problem 2. Suppose the euro is quoted at 0.6786-98 in London, and the pound sterling is quoted at 1.4724-70 in Frankfurt. Is there a profitable arbitrage situation? Describe it.
Problem 3. On checking the Reuters screen, you see the exchange rate and interest rate quotes below. Can you find an arbitrage opportunity? What steps must you take to capitalize on it? What is the profit per $1,000,000 arbitraged?
Currency 90-Day Interest Rates Annualized Spot Rates 90-Day Forward Rates
Dollar 4.99% - 5.03%
Swiss franc 3.14% - 3.19% $0.711-22 $0.726-32
Please show all calculations.