QUESTION 20

You are financial analyst and have been approached by investors to work out for them the feasibility of a covered interest arbitrage. The investors have provided you with the following data. The one year interest rate in Uganda is 6%, while the one-year Tanzania interest rate is 10%. The spot rate of the Uganda shilling is TZS 0.50 and forward rate is TZS 0.54.

REQUIRED:

1. Determine with supporting explanation, whether or not recovered interest arbitrage is feasible.
2. Assuming an initial investment of TZS 1,000,000 or its equivalent in Ugandan shilling show the profit or loss from arbitrage process.