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Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. Group of answer choices $1.63/BP $1.57/BP $1.60/BP $1.66/BP $1.70/BP

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Answer:

$1.57/BP

Explanation:

Calculation for the futures price of the pound for a one-year contract.

Using this formula

Futures price =Spot exchange rate×(1+Risk-free rates in United States/1+Risk-free rates in United Kingdom

Let plug in the formula

Futures price=$1.60×(1.04/1.06)

Futures price= $1.60×(0.9811)

Futures price=$1.57/BP

Therefore the futures price of the pound for a one-year contract to prevent arbitrage opportunities will be $1.57/BP.

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