Question
Currently, the spot exchange rate is $1.30/ and the three-month forward exchange rate is $1.35/. The three-month interest rate is 10% per annum in the
Currently, the spot exchange rate is $1.30/ and the three-month forward exchange rate is $1.35/. The three-month interest rate is 10% per annum in the U.S. and 8% per annum in the U.K. Assume that you can borrow as much as $6,500,000 or 5,000,000. Is interest rate parity (IRP) currently holding? If IRP is not holding, how much is the arbitrage profit if you carry covered interest arbitrage?
- a. IRP is holding and the arbitrage profit is $0.
- b. IRP is not holding and the arbitrage profit is $140,000.
- c. IRP is not holding and the arbitrage profit is $222,500.
- d. IRP is not holding and the arbitrage profit is $385,000.
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Public Finance
Authors: Harvey Rosen, Ted Gayer
10th Global Edition
007715469X, 978-0077154691
