Suppose You Observe the Following 1-Year Interest Rates, Spot Exchange

Multiple Choice

Suppose you observe the following 1-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 1 contract at maturity from this mispricing?

A) $159.22
B) $153.10
C) $439.42
D) None of the above The futures price of $1.48/€ is above the IRP futures price of $1.4641/€, so we want to sell . To hedge, we borrow $14,077.67 today at 4%, convert to euro at the spot rate of $1.45/€, invest at 3%. At maturity, our investment matures and pays €10,000, which we sell for $14,800, and then we repay our dollar borrowing with $14,640.78. Our risk-free profit = $159.22 = $14,800 - $14,640.78.