Question
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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%
Solutions
Expert Solution
| Forward rate= EURO per USD * (1+Interest rate in EURO)/(1+Interest rate in USA) | ||
| Forward rate= | =1.1*(1+0.02)/(1+0.03) | |
| Per USD | 1.09 | |
| Since given forward rate is 1.00, we can see that some arbitrage opportunity is available | ||
| So the funds available are invested in EURO | ||
| Loan taken in USD | $ 100,000 | |
| Equivelent EURO | =100000*1.1 | |
| € 110,000 | ||
| This is invested in EURO so amount after 12 months | =110000*(1+2%) | |
| € 112,200 | ||
| Amount converted back to USD | =112,200/1 | |
| $ 112,200 | ||
| Amount payable in US after 12 months for loan | =100000*(1+3%) | |
| $ 103,000 | ||
| So this way there will be gain | 112200-103000 | |
| So this way there will be gain | $ 9,200 | |
jeff jeffy answered 1 year agoRelated Solutions
Covered Interest Arbitrage. Assume the following information:  
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: * 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 = $.099
180day Mexican interest rate = 6%
180day U.S. interest rate = 4%
Given this information, is covered interest arbitrage
worthwhile for Mexican investors who have pesos to invest? Explain
your answer. Assume you have 1,000,000 Pesos to invest (MXP).
SHOW WORK
Given the following information, find the profits you can make using covered interest arbitrage. Assume you...
Given the following information, find the profits you can make
using covered interest arbitrage. Assume you can borrow either EUR
100,000 or JPY 14,619,883.04
EUR interest rate = 3.5% per year
JPY interest rate = 0.4530% per
year
S (EUR/JPY) = EUR 0.00684 per JPY
F (EUR/JPY) = EUR 0.0074 per JPY for 1
year maturity forward contract.
Which currency would you borrow to conduct covered-interest
arbitrage?
Assume you want your profits in euro, what covered-interest
arbitrage profits do you...
Given the following information, show how you can arbitrage and compute your profit, if you can...
Given the following information, show how you can arbitrage and
compute your profit, if you can borrow 200 million dollars or euros
equivalent for three months. Show your profit in both dollars and
euros
Spot rate ($/€) 1.255
3-month forward rate
($/€) 1.213
3-month U.S. dollar interest rate 2.0%
3-month euro interest rate 1.6%
Given the following information, show how you can arbitrage and compute your profit, if you can...
Given the following information, show how you can arbitrage and
compute your profit, if you can borrow 200 million dollars or euros
equivalent for three months. Show your profit in both dollars and
euros.
Spot rate ($/€) 1.255
3-month forward rate ($/€) 1.213
3-month U.S. dollar interest rate 2.0%
3-month euro interest rate 1.6%
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
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...
How much is your arbitrage profit in Euros at expiration, if you know that the current...
How much is your arbitrage profit in Euros at expiration, if you
know that the current exchange rate is Euro 1.2 / GBP, the 60-day
forward rate is Euro 1.16 /GBP, the risk free rate in Europe is 2%
and the risk free rate in the UK is 4%? Make your calculation so
that the spot transaction is for GBP 500,000.
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