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Statistics Help

**Question: **Assume the following information: the forward premium on the pound in the one-year US dollar-UK pound market is 2%, the one-year interest rate on US dollar denominated assets is 3%, and the one-year interest rate on UK pound denominated assets is 2%. Also transactions costs are zero and there are no market imperfections.

Which of the following statements is TRUE?

An arbitrager can make a risk-free profit by borrowing UK pounds, selling those pounds in the spot market for dollars, using those dollars to invest in a one-year dollar denominated asset, and selling the dollars in the one year forward market for pounds.

An arbitrager can make a risk-free profit by borrowing US dollars, selling those dollars for pounds in the spot market, using those pounds to invest in a one-year pound denominated asset, and selling pounds in the one-year forward market for dollars.

An arbitrager can make a risk-free profit by borrowing US dollars, using those dollars to invest in a one-year dollar denominated asset, and selling the dollars in the one-year forward market for pounds.

An arbitrager can make a risk free profit by going long in the pound.

An arbitrager can make a risk free profit by going long in the dollar.

Edit

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