I have a question on page 42-42 Example 5 in CFAI derivatives book
In question A I got the right number for the correct forward. What confused me was why setting up the arbitrage you take $1.76/1.062 to = $1.6573 and then use that to buy 1/1.062 pounds.
The denominator in both of those is the UK risk free rate. They give us that the spot is $1.76. Why do you use the UK risk free rate here.
Why don’t you convert the spot to pounds at 1/1.76 then invest in the UK risk free rate of 1.062
I checked the Schweser video that I have and they don’t even mention this analysis
Thanks in advance all
In question A I got the right number for the correct forward. What confused me was why setting up the arbitrage you take $1.76/1.062 to = $1.6573 and then use that to buy 1/1.062 pounds.
The denominator in both of those is the UK risk free rate. They give us that the spot is $1.76. Why do you use the UK risk free rate here.
Why don’t you convert the spot to pounds at 1/1.76 then invest in the UK risk free rate of 1.062
I checked the Schweser video that I have and they don’t even mention this analysis
Thanks in advance all