Question
Taking advantage of the carry trade Example: Spot rate = 9.5 pesos/$ Forward Rate = 10 pesos/$ You have $1,000,000 Interest Rates: One year Govt
Taking advantage of the carry trade
Example:
Spot rate = 9.5 pesos/$
Forward Rate = 10 pesos/$
You have $1,000,000
Interest Rates:
| One year Govt debt Rate Mexico 7% USA 1% |
- Can you make money off of this?
- What are the effects of covered interest arbitrage?
- Calculation of % premium or discount. Premium or discount size should be equal to but opposite in sign to interest rate difference.
- [(Fwd Spot)/Spot] X 12/n 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 Careful this is a common mistake on exams)
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The Laymans Guide To Managing Your Investments
Authors: Thomas Dunleavy
1st Edition
979-8763592214
