Covered Interest Arbitrage in Both Directions.

1) The oneyear interest rate in New Zealand is 4 percent. The oneyear U.S. interest rate is 5.5 percent. The spot rate of the New Zealand dollar (NZ$) is $.60. The forward rate of the New Zealand dollar is $.615. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.

Question

Covered Interest Arbitrage in Both Directions.

1) The oneyear interest rate in New Zealand is 4 percent. The oneyear U.S. interest rate is 5.5 percent. The spot rate of the New Zealand dollar (NZ$) is $.60. The forward rate of the New Zealand dollar is $.615. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.

Accepted Answer

To determine whether covered interest arbitrage is feasible for US investors and New Zealand investors we need to compare the returns they can achieve ...

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Covered Interest Arbitrage in Both Directions. 1) The oneyear interest rate in New Zealand is 4 percent. The oneyear U.S. interest rate is 5.5 percent.

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