Question
Covered Interest Arbitrage Assume the following information: Spot rate today of Swiss franc = $.60 1-year forward rate as of today for Swiss franc =
Covered Interest Arbitrage
Assume the following information:
| Spot rate today of Swiss franc | = | $.60 |
| 1-year forward rate as of today for Swiss franc | = | $.63 |
| Expected spot rate 1 year from now | = | $.62 |
| Rate on 1 year deposits denominated in Swiss francs | = | 5% |
| Rate on 1 year deposits denominated in U.S. dollars | = | 9% |
Which investors, Swiss or American, benefit from covered interest arbitrage? How would covered interest arbitrage impact the quotes above?
Show all calculations to support your answer. Make sure that it is clear which quotes are impacted and how they are impacted.
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Shape Up Your Finances
Authors: Ian Birt
2nd Edition
1925716422, 978-1925716429
