If British banks pay 2% interest and American banks pay 5% interest on deposits, is there...

If British banks pay 2% interest and American banks pay 5% interest on deposits, is there a risk-free way you could make a profit? What factors you have to consider?

Expert Solution

There is a way to make the profits between the rate of interest which is provided by the British banks and the American banks and we should be analysing it as follows-

A. we should be looking for the exchange rate fluctuation because we had to take exposure in another currency and we will have to ascertain the dollar in terms of great Britain Pound or great Britain Pound in terms of dollar and we will be trying to ascertain the fluctuation of this currency in respect to the time duration during which we are taking the exposure into & interest rate so there is a very high dependence upon the spot rates and the forward rates in the currency markets of dollars and great Britain Pound in order to create a risk-free arbitrage

When there is lower rate of interest between the banks of two economies then we will be trying to ascertain these rates in accordance with their exchange rates so then only we can understand the arbitrage process and through exposure in the real life because the interest rates are not the complete reflection of managing with the cost but so after the interest rates has been synchronised in relation with the exchange rate fluctuations, we are eventually going to ascertain whether we are going to gain in arbitrage or not.

jeff jeffy answered 2 years ago

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