domani

US unannualized rate:
= 0.045*120/360 = 0.015
UK unannualized rate
= 0.056*120/360 = 0.0187
Calculate what no arbitrage forward price is:
FP = SP * (1 + rate US)/(1 + rate UK)
= 1.5 $/GBP * (1.015)/(1.0187)
FP = 1.4946 $/GBP
Now compare to the quoted forward of 1.45 $/GBP
Note that the quoted price shows that GBP is undervalued compared to the arbitrage price (the GBP converts to less US dollar)
The result? If the forward shows GBP is undervalued, then the US is overvalued.
So we want to sell US forward using the quoted forward price
In order to sell USD in the future, we’ll need to buy US today (converting from GBP at the spot price)
A. Sell USD for GBP forward and buy USD for GBP spot
It’s all about thinking what currency you’ll need to sell at the forward price to decide what currency you need to hold and invest at the risk-free rate today.