Assume that annual interest rates are 2 percent in the, Financial Management

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Assume that annual interest rates are 2 percent in the

Assume that annual interest rates are 2 percent in the United States and 0.75 percent in UK. GW Bank can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates in either country. The spot rate is $1.40/GBP.

a. If the forward rate is $1.45/ GBP, how could the bank arbitrage using a sum of $1 million? What is the spread earned (return on $1 million)?

b. At what forward rate is this arbitrage eliminated?

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