Question
In class, we talked about covered interest parity: It should hold under no arbitrage. Imagine you are an investor located in the United States. Find
In class, we talked about covered interest parity: It should hold under no arbitrage. Imagine you are an investor located in the United States. Find a foreign government bond yield/bank deposit rate any maturity. (Make it an interesting country, something with yield>2%, if you find a true arbitrage opportunity, then you can make some money.) a) What is the currency spot rate between USD and your chosen currency? b) What is the USD rate for that maturity from the US yield curve (use US treasury yield curve rates)? c) What is the implied forward rate? d) Find an FX futures exchange rate quote for that maturity and write it down. (If you cant find a matching maturity say how close you can get, is the basis risk hedgeable?) e) Do you have an arbitrage opportunity? (If you didnt find a futures contract, then just write the no-arbitrage futures price for your chosen maturity)
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