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

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