Question
Assume the following information: You have $1,000,000 or the equivalent to invest Current spot rate of pound = $1.30 90-day forward rate of pound =
Assume the following information: You have $1,000,000 or the equivalent to invest
Current spot rate of pound = $1.30 90-day forward rate of pound = $1.27
90-day nominal interest rate in U.S. = 5%
90-day expected inflation rate in U.S. = 2%
90-day expected inflation rate in Great Britain = 5%
3 month nomial interest rate in Great Britain = 7%
1) Is covered interest arbitrage feasible in this situation?
2) Who will benefit from it, U.S. investors or British investors?
3) What is the percentage return after 90 days? Calculate the riskless profit in dollars or pounds. Show all steps to receive credits.
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