Use currency derivatives to speculate or hedge in the foreign exchange market to solve the following problems:
Problem 1: An investor wishes to buy euros spot (at $0.9080) and sell euros forward for 180 days (at $0.9146).
a. What is the swap rate on euros?
b. What is the forward premium or discount on 180-day euros?
Problem 2: Suppose the euro is quoted at 0.7064-80 in London and the pound sterling is quoted at 1.6244-59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.
b. Compute the percentage bid-ask spreads on the pound and euro.