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Suppose that the current spot exchange rate is 0.83 per $ and the three-month forward exchange rate is 0.8113 per $. The three-month interest rate
Suppose that the current spot exchange rate is 0.83 per $ and the three-month forward exchange rate is 0.8113 per $. The three-month interest rate is 5.60 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or 830,000.
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- How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars? What will be the size of your arbitrage profit?
- Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros. How will you realize a certain profit and size of your arbitrage profit?
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