(a) You are given the followin

1. (a) You are given the following data: the spot exchange rate is USD/EUR 1.21; the p.a. simple interest rate on a six-month deposit is 4 percent in the US and 5 percent in Europe. Compute:

1. The forward rate for a six-month forward contract
2. The time-T EUR value of a USD_T 1 six-month forward sale
3. The time-t EUR value of a USD_T 1 six-month forward sale
4. The time-T EUR value of a EUR_t 1 six-month investment

The time-t USD value of a EUR_t 1 six-month forward sale

(b) Suppose you are quoted the following EUR/USD spot and forward rates:

Spot 3-month forward p.a. 3-month

bid-ask bid-ask interest rate

EUR 5.50-5.60

USD 0.80-0.90 0.85-0.92 4.00-4.40

(i) What are the 3-month synthetic-forward EUR/USD bid-ask rates?

(ii) Are there any arbitrage opportunities? Are there any opportunities for least-cost dealing at the synthetic rate? If yes, explain how you would take advantage of them.