Derivatives (Forward Price - Arbitrage)

Hello everyone,
A cash manager of a large US insurance company, has borrowed 80.000.000 EUR. The time to maturity of this position, when he has to decide to hedge against FOREX fluctuations, is 6
months. (The base is EUR)

Spot rates (FOREX):
EUR/USD: 1.1005-10.
Money Markets:
USD 6 MONTHS: 1.25% - 1.50%.
EUR 6 MONTHS: 0.25% - 0.30%.

Question : Explain the currency forward pricing.

My answer : The insuror is holding EUR for 6 months (so it’s long forward EUR 6 months), then he should short EUR currency forward 6 months to hedge.
The pricing is the following: we replicate the forward strategy by an arbitrage
1st we borrow EUR 0.30
2nd we sell EUR/buy USD at spot = 1.1005
then we invest USD at 1.25
Please correct me if I’m wrong. :slight_smile:

Good luck everyone! :slight_smile: