Question
Assume the following information: Current spot rate of the Australian dollar = $.64 , Forecasted spot rate of Australian dollar 1 year from now =
Assume the following information:
Current spot rate of the Australian dollar = $.64 , Forecasted spot rate of Australian dollar 1 year from now = $.59 , 1-year forward rate of the Australian dollar = $.62 , Annual interest rate for Australian dollar deposit = 9% , Annual interest rate in the U.S. = 6%
Given the information above,
a) Determine whether covered interest arbitrage (CIA) opportunity exists in the market. Please show detailed calculations and explanations.
b) If an investor can borrow $500,000 or its Australian dollar equivalent today to conduct covered interest arbitrage, how much CIA profit can this investor make? Please show detailed calculations and explanations.
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