Calculate the dollar profit from the covered interest arbitrage stragety using the information below. Assume 1000000....

Calculate the dollar profit from the covered interest arbitrage stragety using the information below. Assume 1000000. Do not round any interimaditae caculations ( keep at least two decimals).

Cureent spot rate of new zealand dollar (USD/NZD) = 0.56

One year forward rate of the New Zealand dollar (USD/NZD) = 0.73

Annual IR on New Zealand dollars (in%) = 1.31

Annual IR on U.S. dollars (%) = 0.89

Expert Solution

jeff jeffy answered 1 year ago

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?

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%

Given the following information, find the profits you can make using covered interest arbitrage. Assume you...

Given the following information, find the profits you can make using covered interest arbitrage. Assume you can borrow either EUR 100,000 or JPY 14,619,883.04 EUR interest rate = 3.5% per year JPY interest rate = 0.4530% per year S (EUR/JPY) = EUR 0.00684 per JPY F (EUR/JPY) = EUR 0.0074 per JPY for 1 year maturity forward contract. Which currency would you borrow to conduct covered-interest arbitrage? Assume you want your profits in euro, what covered-interest arbitrage profits do you...

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.

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...

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

Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She has...

Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She has $1,000,000 and sees the following spot and forward rate quotes offered: Spot = $1.40/Euro Forward180 day = $1.42/Euro Alana can earn 5% interest per annum on a 1-year US government bond and 3% interest per annum on the equivalent French bond. Assuming Alana can sell either bond after six months for the same price she paid, excluding trading costs does Alana...

1. Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She...

1. Althea the arbitrageur wants to make a riskless profit by attempting covered interest arbitrage. She has $1,000,000 and sees the following spot and forward rate quotes offered: Spot = $1.40/Euro Forward180 day = $1.42/Euro Alana can earn 5% interest per annum on a 1-year US government bond and 3% interest per annum on the equivalent French bond. Assuming Alana can sell either bond after six months for the same price she paid, excluding trading costs does Alana have an...

Assume the market is in zone 4 of the covered interest arbitrage parity (CIAP) grid where...

Assume the market is in zone 4 of the covered interest arbitrage parity (CIAP) grid where the interest rate differential is against the U.S. and the foreign currency is at a forward discount. (1) Determine the direction of the flow of funds. (2) What will happen to the interest rate differential and the forward discount as short-term funds move from one country to another? Explain why each change is happening

Explain why uncovered interest arbitrage is considered more risky than covered interest arbitrage.

Question