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

Question

Quizplus · Accepted Answer

The arbitrage profit is calculated using the formula: $ \text{Profit} = \left( \frac{S_0 \times (1 + i_{\$})}{(1 + i_{€})} - F_{360} \right) \times \text{Contract Size} $. Substituting the given values: $ \text{Profit} = \left( \frac{1.45 \times 1.04}{1.03} - 1.4 \right) \times 10,000 = 159.22 $.

Suppose You Observe the Following One-Year Interest Rates,spot Exchange Rates