Covered Interest Arbitrage Assume the following information: Spot rate of Canadian dollar = $.80 90-day forward rate
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Covered Interest Arbitrage Assume the following information:
Spot rate of Canadian dollar = $.80 90-day forward rate of Canadian dollar
= $.79 90-day Canadian interest rate = 4%
90-day U.S. interest rate = 2.5%
Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1 million.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
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Kirti Kaushal
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