Question
a) The following information is given to an Australian hedge fund. The fund currently has A$10m sitting in a current account, thus is considering to
a) The following information is given to an Australian hedge fund. The fund currently has A$10m sitting in a current account, thus is considering to deploy this amount of money in short term. Would the fund be able to make profits from covered interest arbitrage?
| Bid quote | Ask quote | |
| NZ$ Spot | A$0.9216 | A$0.9286 |
| One-year NZ$ Forward | A$0.9304 | A$0.9374 |
| Deposit rate | Loan rate | |
| In Australia (on A$) | 1% | 2.5% |
| In New Zealand (on NZ$) | 1.5% | 2.5% |
b) Would the hedge fund still benefit from this arbitrage if it has to borrow in Australia to make investment instead of using its own fund?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Survey of Accounting
Authors: Edmonds, old, Mcnair, Tsay
2nd edition
978-0073379555
