QUESTION EIGHT

Suppose the interest rate on $$ is $15\%$ in London, and the interest rate on a comparable

Tanzanian shilling investment in Dar Es Salaam is $10\%.$ The $$ spot rate is TZS$2,750$ and

the one$-$year forward rate is TZS$2,680.$

REQUIRED:

$($i$)$ Are there opportunities for covered interest arbitrage? Show relevant

computations.

$($ii$)$ Is there covered interest differential in favor of London or Dar Es Salaam?

$($iii$)$ Illustrate the profits associated with covered interest arbitrage by showing the

steps that a Tanzanian arbitrageur can take to profit from the discrepancy in rates.

Assume that the borrowing and lending rates are identical and the bid$$ask spread

in the spot and forward market is zero