Covered Interest Arbitrage. Assume the following information: * British pound spot rate = $1.65. * British...

Covered Interest Arbitrage. Assume the following information:

* British pound spot rate = $1.65.

* British pound one-year forward rate = $1.65

* British one-year interest rate = 12 %.

* U.S. one-year interest rate = 10 %.

Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9 percent. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.

Expert Solution

jeff jeffy answered 2 years ago

Part III: Interest Rate Parity and Covered Interest Arbitrage Assume the following information: Current spot rate...

Part III: Interest Rate Parity and Covered Interest Arbitrage Assume the following information: Current spot rate of Australian dollar = $.65 Forecasted spot rate of Australian dollar 1 year from now = $.69 1-year forward rate of Australian dollar = $.68 Annual interest rate for Australian dollar deposit = 5% Annual interest rate in the United States = 8% According to Interest Rate Parity, is the covered interest arbitrage feasible to U.S. investors and Australian investors? Please explain your answers...

Covered Interest Arbitrage: The spot rate is currently: 1.6131 $/pound US interest rate 1.0% The 6...

Covered Interest Arbitrage: The spot rate is currently: 1.6131 $/pound US interest rate 1.0% The 6 month forward is: 1.6022 $/pound UK interest rate 2.5% a.) Is Arbitrage possible? Use the forward as a percentage to show why. What items do you compare to arrive at your answer? Explain fully. b.) Us the forward as a percentage in a sentence that correctly describes what it means. c.) How to Profit. For this part show how the arbitrage would be carried...

2. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180day...

2. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180day forward rate of Mexican peso = $.099 180day Mexican interest rate = 6% 180day U.S. interest rate = 4% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer. Assume you have 1,000,000 Pesos to invest (MXP). SHOW WORK

Covered Interest Arbitrage. Assume the following information: &nbsp

Covered Interest Arbitrage. Assume the following information: Quoted Price Spot rate of Canadian dollar $.90 90‑day forward rate of Canadian dollar $.88 90‑day Canadian interest rate 4.4% 90‑day U.S. interest rate 1.6% Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180‑day forward...

Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180‑day forward rate of Mexican peso = $0.097 180‑day Mexican interest rate 0.06 180‑day U.S. interest rate 0.065 Suppose an initial investment of 1,000,000 pesos. Given this information, Mexican Investors would generate a yield of ???

Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate...

Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate on 1-year government bonds is 4.4% in the United States and 7.2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

The spot exchange rate for the British pound is $1.2576. The U.S. interest rate is 0.25...

The spot exchange rate for the British pound is $1.2576. The U.S. interest rate is 0.25 percent, and the British interest rate is 0.50 percent. A futures contract on the exchange rate for the British pound expires in 110 days. (a) Find the appropriate futures price. [3M] (b) Find the futures price under the assumption of continuous compounding. [3M] (c) Suppose the actual futures price is $1.3250. Is the future contract mispriced? If yes, how could an arbitrageur take advantage...

How much arbitrage profit can you obtain with the following information? Hint. Covered interest arbitrage Spot...

How much arbitrage profit can you obtain with the following information? Hint. Covered interest arbitrage Spot exchange rate: 1.1 Euro / dollar Forward exchange rate: 1 Euro / dollar Risk free rate in U.S: 3% Risk free rate in Europe: 2%

Assume the spot rate of the ? is $1.7000. The British interest rate is 10%, and...

Assume the spot rate of the ? is $1.7000. The British interest rate is 10%, and the U.S. interest rate is 11% over the 360?day (1 year) period. The British inflation rate is 4% and the U.S. inflation rate is 3.5% over the 360-day (1 year) period. The 180-day forward price is $1.7200/?. The 180-day European call option on the $ with the exercise price of ?0.5800 is selling at 3% premium, while the 180-day European put option on the...

Spot and forward exchange rates for the British pound are as follows: Spot exchange rate =...

Spot and forward exchange rates for the British pound are as follows: Spot exchange rate = 1.4500 USD/GBP, 90-day forward exchange rate =1.4416 USD/GBP, 180-day forward exchange rate = 1.4400 USD/GBP. Additionally, a 180-day European call option to buy 1 GBP for USD 1.42 costs 3 cents, and a 90-day European put option to sell 1 GBP for USD 1.49 costs 3 cents. Which of the following is the correct arbitrage strategy? Select one: Buy the 90-day forward contract and...

Question