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BID ASK i(USD,180d) 1.95% 2.05% i(GBP,180d) 0.70% 0.80% S(USD/GBP) 9.0000 9.0400 F(USD/GBP,180d) 9.1250 9.1400 Question: Please give detailed workings: Can you identify a protable covered

BID

ASK

i(USD,180d)

1.95%

2.05%

i(GBP,180d)

0.70%

0.80%

S(USD/GBP)

9.0000

9.0400

F(USD/GBP,180d)

9.1250

9.1400

Question: Please give detailed workings:

Can you identify a protable covered interest arbitrage strategy and if yes how large is its prot if you use USD 1 million for this trade? In order to identify arbitrage opportunities in the presence of a bid-ask spread, you now have to check the two possible arbitrage strategies: investing in GBP with money borrowed in USD and investing in USD with money borrowed in GBP with the exchange risk being hedged in both cases.

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