Question
A trader dealing in South African Rand (ZAR) and Euros (EUR) faces the following data: Funds available: 2 million EUR EUR/ZAR spot exchange rate: 12.4125
A trader dealing in South African Rand (ZAR) and Euros (EUR) faces the following data: Funds available: 2 million EUR EUR/ZAR spot exchange rate: 12.4125 EUR/ZAR six-month forward rate: 12.8825 ZAR 6-month interest rate: 6.60% per annum EUR 6-month interest rate: 0.30% per annum Required (a) Calculate the forward premium on the South African Rand; (b) Is there an opportunity for covered interest arbitrage (CIA)? What profit, if any, could be made with the CIA? (c) If the spot rate in six months time were 12.6700 ZAR per EUR, what uncovered interest arbitrage profit could be made?
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