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As a foreign exchange trader, you see the following quotes from two different banks: UK pound () interest rates 2.0% 3.0% p.a. South African (ZAR)
- As a foreign exchange trader, you see the following quotes from two different banks:
| UK pound () interest rates | 2.0% 3.0% p.a. |
| South African (ZAR) interest rates | 4.0% 5.0% p.a. |
| Spot exchange rates | ZAR 13.3/ ZAR 13.9/ |
| 6-month forward exchange rates | ZAR 12.6/ ZAR 13.2/ |
- Is there an opportunity for covered interest arbitrage if you can borrow 1 million to invest in South African Rand? Clearly explain your answer and show all relevant calculations.
[25 marks]
- Is there an opportunity for covered interest arbitrage if you can borrow ZAR1 million to invest in UK pounds? Clearly explain your answer and show all relevant calculations.
[25 marks]
- Determine the range of 6-month forward rates for which there will be no arbitrage opportunity in both (i) and (ii) above.
[25 marks]
- Do deviations from interest rate parity represent unexploited profit opportunities? Briefly discuss why an investor might not take on a covered interest arbitrage, even if the interest rate parity did not hold.
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