Question
Interest rates in India are 5.25% p.a. and in Brazil they are currently at 2.5% p.a. The BRL/INR spot rate is 13.37. (a) Calculate the
Interest rates in India are 5.25% p.a. and in Brazil they are currently at 2.5% p.a. The BRL/INR spot rate is 13.37.
(a) Calculate the theoretical three-year forward rate of the BRL implied by Interest Rate Parity.
(b) Now assume the actual two-year forward rate is BRL/INR 15.20. What, if any, is the percentage return from engaging in Covered Interest Arbitrage? Assume a transaction cost of 0.3% in the spot and the forward market. (Calculate the result as a percentage of your initial borrowing, accurate to 4 decimal places, making sure to include any opportunity cost in your calculations)
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Multinational Financial Management
Authors: Shapiro A.C.
9th International Edition
8126536934, 9788126536931
