Taking advantage of the \"carry trade\" Example: Spot rate = 19 pesos/f5 One year Forward Rate = 20 pesosl$ You have $1,000,000. Interest Rates: One year Govt debt Mexico USA a. Can you make money off of this ???? b. What are the effects of covered interest arbitrage? c. What should the forward rate be to eliminate this arbitrage opportunity. d. Calculation of % premium or discount. Premium or discount size should be eql but opposite in sign to interest rate differential. [(Fwd Spot)/ Spot] X 12 X 100 = % premium or discount Use this formula with direct rates (units of local currency per one unit of foreign) Indirect rates are units of foreign currency per one unit of local currency. (be Car