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You notice that the 9-month risk free interest rates in the UK is 4% per...

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Finance

You notice that the 9-month risk free interest rates in the UK is 4% per annum with continuous compounding and the US rate is 7% per annum, with continuous compounding. The spot price of the Pound Sterling is $0.2500. Assume the US is your home country.

You observe that the 9-month futures price in the market is $0.2775. State why an arbitrage opportunity exists and explain how you would take advantage of this arbitrage opportunity.

(Hint: Your answer should include your general strategy in broad terms and your step-by step approach to exploiting the arbitrage opportunity using numbers from this question)

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