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3. (3) Assume the following data. Further assume that lending and borrowing interest rates are the same. US interest rate = 6% a year (1.5%
3. (3) Assume the following data. Further assume that lending and borrowing interest rates are the same.
US interest rate = 6% a year (1.5% for 3 months),
UK interest rate = 4% a year (1% for 3 months)
Spot exchange rate now = 1.5$/BP
90-day forward exchange rate now = 1.59$/BP
(a) Show numerically if there is an opportunity for a covered interest rate arbitrage?
(b) Where would you invest for 90 days, covering foreign exchange risk?
(c) Where would you borrow for 90 days, covering foreign exchange risk?
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