Suppose that the six-month interest rate in the United Kingdom is 0.5% per annum the sixmonth...

Suppose that the six-month interest rate in the United Kingdom is 0.5% per annum the sixmonth interest rate in Germany is 1.2% per annum. If the spot exchange rate is GBP/EUR 1.1286 and the six-month forward exchange rate is GBP/EUR 1.1312.

Assume that the arbitrager can borrow up to EUR 1,000,000 or the equivalent GBP amount, at the spot rate.

a. Can the arbitrager make a covered interest arbitrage (CIA) profit, justify your answer?

b. If yes, determine how much profit can be realised. Show all your calculations.

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

A. AS IRP DIDNOT HOLD GOOD THERE IS AN covered interest arbitrage (CIA) profit POSSIBLE.

A&B.

jeff jeffy answered 1 year ago

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Suppose that the six-month interest rate in the United Kingdom is 0.5% per annum the sixmonth...

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