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The 3-year US dollar interest rate is 3% and the 3-year Russian ruble interest rate is...

  1. The 3-year US dollar interest rate is 3% and the 3-year Russian ruble interest rate is 8%. The spot exchange rate is RUB25/$ and the 3-year forward exchange rate is RUB30/$.

    1. A covered interest arbitrage opportunity exists: borrow dollars

    2. Borrow rubles because the ruble is at a forward discount

    3. A covered interest arbitrage opportunity exists: borrow rubles

    4. Borrow dollars because US interest rates are lower.

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Answer #1

Dollar is trading at forward premium
Ruble is trading at forward discount

forward rate should be =25*1.08/1.03=26.21359223 RUB/$
But as market rate is more than the theoretical rate dolalr is overvalued and hence arbitrage opportunity exists and we will sell dollar forward and borrow rubles

A covered interest arbitrage opportunity exists: borrow rubles

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