Assume your return on U.S. dollar bonds is $$$ = 5% and the current exchange rate is S(0) = $ 1.6 per £ . Assume your return on British sterling bonds is £ = 12%. The Forward price of stock is S(1) = $ 1.45 per £ with delivery date 1 year therefore there I believe that there is an arbitrage opportunity but need help developing the portfolio at time 0 and time T
2026-04-03 17:28:10.1775237290
Foreign exchange arbitrage opportunity
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1
Yes there is an arbitrage opportunity:
$\frac{F_{theoretical}}{S_{0}} = \frac{1+0.05}{1+.12} = \frac{1.05}{1.12}$ $F_{theoretical} = 1.5$ $F_{observed} = 1.45$
Strategy:
Borrow 1 pound and buy dollar at 1.6. Invest 1.6 dollar for a year and get 1.68 dollars and sell dollar and get 1.1586206 pounds at the end of one year. Pay off 1.12 pounds of loan and make riskless profit of 0.0386206 pounds.
Goodluck