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Currently the spot exchange rate is $1.50/ and the three month forward exchange rate is $1.52/. The three month interest rate is 8.0% per annum
- Currently the spot exchange rate is $1.50/ and the three month forward exchange rate is $1.52/. The three month interest rate is 8.0% per annum in the US and 5.8% per annum in the UK. Assume that you can borrow as much as $1M. or 1M.
- Is there a covered interest arbitrage opportunity for a US multinational? What is the payoff if they conducted CIA?
- Is there a covered interest arbitrage opportunity for a UK multinational? What would be their payoff if they conducted CIA?
- How will the covered interest rate parity be restored?
- What should have been the correct forward exchange rate?
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