Covered Interest Arbitrage Interest rate parity exists between the United States and Poland (its currency is the

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Covered Interest Arbitrage Interest rate parity exists between the United States and Poland

(its currency is the zloty). The 1-year risk-free CD

(deposit) rate in the U.S. is 7 percent. The 1-year risk-free CD rate in Poland is 5 percent and denominated in zloty. Assume that there is zero probability of any financial or political problem in either country such as a bank default or government restrictions on bank deposits or currencies. Myron is from Poland and plans to invest in the U.S. What is Myron’s return if he invests in the United States and covers the risk of his investment with a forward contract?

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