Explore BrainMass
Share

Explore BrainMass

    Arbitrage with Forward and Option Contracts

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Suppose that the Euro-USD spot and forward exchange rates are as follows:
    Spot 1.34
    90-day forward 1.3380
    180-day forward 1.3348

    What opportunity is open to an arbitrageur when a 180-day European call option to buy 1 Euro for $1.3083 costs $0.02 per Euro? Assume the size of forward and options contracts to be 1,000,000 Euros each. Ignore borrowing costs.

    © BrainMass Inc. brainmass.com October 10, 2019, 5:58 am ad1c9bdddf
    https://brainmass.com/business/arbitrage-pricing-theory/arbitrage-forward-option-contracts-523835

    Solution Preview

    Currently:
    Sell a forward contract to deliver 1,000,000 Euros 180 days from now at the exchange rate ...

    Solution Summary

    This solution analyzes the arbitrage opportunity given forward and call option contracts.

    $2.19