1. e covered interest arbitrage consists of two parts: the interest rate differential and the fx spot vs future price differential, explain. Assuming one of the currencies to be your group currency and the for the other chose any one of the remaining 5 we have been following in the class (explain your choice of the other country/ currency; it should be the one that can make you the maximum profit).

Set up and run the arbitrage for 6 months starting today. What will be your overall profit / loss from the strategy.

(For inputs use Bloomberg. You will need two risk free rates (for the two countries), Spot exchange rate and the 6-month forward rate. Functions that might come in handy, COUN XYZ, FRD).

Have you accounted for spreads (explain the various spreads in this covered interest arbitrage)? How does your profit loss change if you account for spreads? Negative spread of buying in one country and selling for lower in another

If you could do a carry trade instead. Would you still choose the same country / currency? How would you minimize your fx risk in the carry trade (hint: look at FXFC). (5+5+8+5+7) Invest in a country whos interest rate is going to increase

Forecast USDJPY (109)SPOT 105 Appreciating Interest Difference

USDMXN (19.15)SPOT 19.87 Dep -3.62% 6.66% 3.04%

USDGBP 0.76923 0.80645 DEP 0.54% 0.54% -4.08%

USDEUR 0.9009 0.9009 SAME 0 0 0

USDINR 71.19 72 DEP 5.59% 5.59% 4.46%

USDCNY 7.07 7.2 DEP 2.67% 2.67% 0.86%

USDCAD 1.31 1.32 DEP 1.65% 1.65% 0.89%