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Suppose that the annual risk-free rate of interest is 0% in Japan and 10% in Hong Kong, the spot exchange rate is 10 Japanese yen per Hong Kong dollar, and the one-year forward exchange rate is 9 yen per dollar. Determine whether or not there is an arbitrage opportunity and, if possible, construct an arbitrage portfolio. Assume that borrowing at the risk-free rate is possible, and any asset can be sold short. Provide as much details about current and future cash flows as possible.

Microeconomics, Economics

  • Category:- Microeconomics
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