Question
In: Finance
Use the data below to answer the three questions that follow it. $/£ (USD/GBP) - Sport...
Use the data below to answer the three questions that follow it. $/£ (USD/GBP) - Sport Rate is 1.2360 $/£ (USD/GBP) - 180-day forward rate is 1.2300 $ interest rates are 0.25% (one quarter of a percent or 25 basis points) £ (GBP) interest rates are 1.00%
If you could borrow either £ 10,000,000 or $ 10,000,000 how much profit could you make from a covered interest arbitrage? Be sure to state your answer in terms of USD or GPB.
Solutions
Expert Solution
As per Interest rate parity:
As per Interest rate parity the difference in spot fate and forward rate exits due to differences in interest rate between two countries.
F/S = (1+ra)/(1+rb)
F= forward rate
S = spot rate.
ra = interest rate of price currency.
rb= interest rate of base currency.
If the above equation does not hold good then there is a chance of Arbitrage.
Answer: 25,970.87 (rounding off errors from your answer).
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jeff jeffy answered 1 year agoRelated Solutions
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