Question

SMC Corp. with $10m available funds is exploring uncovered interest arbitrage (UIA) opportunities under the following scenario: Spot Rate = 0.7776 ($/£) 180-day forward rate = 0.7599 ($/£) Expected Spot Rate in 180 days = 0.7752 ($/£) 180-day US interest rate = 3% 180-day UK interest rate = 1.85% The uncovered interest arbitrage potential is:

Select one:

a. None of the Above

b. -0.31%

c. 0.31%

d. 1.77%

e. -1.67%

Answer 1

Spot Rate = 0.7776 Dollar per Euro

180 Days US Interest Rate = 3%

180 Days UK Interest Rate = 1.85%

Expected 180 Days Spot Rate = 0.7776*1.03/1.0185

= 0.7864

Actual Spot Rate after 180 Days = 0.7752

Loss = (0.7864-0.7752)/0.7864

= 1.42%

So Answer will be A None of the above