Question
The annual risk-free interest rate is 8% in the U.S. and 3% in Mexico. The spot rate is $0.045 per peso and the one-year forward
The annual risk-free interest rate is 8% in the U.S. and 3% in Mexico. The spot rate is $0.045 per peso and the one-year forward rate is $0.048 per peso.
Who can profit from covered interest arbitrage, and how? Ignore taxes and transaction costs.
a U.S. investors can profit by selling pesos in the forward market.
b No one can profit from covered interest arbitrage.
c Mexican investors can profit by buying dollars in the forward market.
d U.S. investors can profit by buying pesos in the forward market.
e Mexican investors can profit by selling dollars in the forward market.
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