Question
Suppose you observe the following: S(EUR/USD) 0.9514 F(EUR/USD) 0.9478 i(US) 1.75% p.a i(EU) 2.00% p.a The observed forward rate is for a 9-month maturity. Show
Suppose you observe the following:
| S(EUR/USD) | 0.9514 |
| F(EUR/USD) | 0.9478 |
| i(US) | 1.75% p.a |
| i(EU) | 2.00% p.a |
The observed forward rate is for a 9-month maturity.
Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of EUR. Also determine the size of your arbitrage profit. Suppose you can borrow either 1.5 mil USD or 1.5 mil EUR.
Show your workings. Keep 4 decimal places for exchange rate calculation.
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Advanced Accounting
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng
11th edition
538480289, 978-0538480284
