Covered interest arbitrage Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible Covered interest arbitrage Assume the following nformation: 5 6 Spot rate of Chinese yuan 90-day forward rate of Chinese yuan 90-day Chinese yuan deposit rate 90-day Australian dollar deposit rate A$0.1981 A$0.2052 25% 3.5% Given this information, what would be the yield (percentage return) to an Australian investor who used covered interest arbitrage? (Assume the investor invests A$1 million.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage? 7 Covered interest arbitrage Assume the following information: Spot rate of Mexican peso 180-day forward rate of Mexican peso 180-day Mexican interest rate 180-day Australian dollar interest rate A$0.0743 A$0.0737 37% 25% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your