Question
Suppose you observe that 90day interest rate across the eurozone is 6%, while the interest rate in the U.S. over the same time period is
Suppose you observe that 90day interest rate across the eurozone is 6%, while the interest rate in the U.S. over the same time period is 3%. Further, the spot rate and the 90day forward rate on the euro are both $1.60.
You have $600,000 that you wish to use in order to engage in covered interest arbitrage.
If many individuals recognize the same arbitrage opportunity, and sell euros forward just as you did, this would place (Downward or Upward) pressure on the forward rate. This would continue until the (Discount or Premium) on the forward rate (relative to the current spot rate) was approximately (5% or 4% or 3% or 2% or 1%) .
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started