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Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one-year interest rate is 6% in euros
Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one-year interest rate is 6% in euros and 5% in pounds. You can borrow at most 4,500,000 or the equivalent pound amount, that is 3,000,000, at the current spot exchange rate. Assume that you are a pound-based investor, what is the pound amount of the arbitrage profit if you carry out covered interest arbitrage? Question 14 options: a) 337,500 b) 168,750 c) 270,000 d) 134,250
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