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Suppose you are trading currency options at the Chicago Mercantile Exchange on September 28, 2002. The current US-German exchange rate is .71 dollars...
Suppose you are trading currency options at the Chicago Mercantile Exchange on September 28, 2002. The current US-German exchange rate is .71 dollars per mark. The German interest rate is 3.5% and the U.S. interest rate is 5.25%. Suppose a call which gives the holder the right to buy marks at a rate of .70 dollars per mark is selling for .0163 per mark and a put which gives the holder the right to sell marks at a rate of .70 dollars per mark is selling for .0102 per mark. Each option contract is for 125,000 marks. Assume both the put and the call are European and they both expire on November 17, 2002. What arbitrage opportunities are available? Show the cash flows associated with your arbitrage strategy.
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