Question

A foreign exchange trader based in the U.S., authorized to borrow $600,000 or its foreign currency equivalent, faces the following quotes: Spot rate $1.2015/pound Six month forward $1.2241/pound US interest rate 6.10% per annum UK interest rate 5.50% per annum Is covered interest arbitrage possible? a. yes b. no If your answer is yes, how much risk free profit could she earn? Show all steps.

Answer 1

Arbitrage profit is $9,796.25

Amount = $600,000 Spot sate= $1.2015 | s Gmf = $1.2241le & us Rate - 6. 104. p.a. ros (Actual). UK Rate & 5.50%. p.a vor. f. (it ros) (1+ruk) 1.2241 - (14 ros') 2 1. 2015 (it 0.055) 2 dos = 9.365% ( Should be). since Actual < should be Borrow in USD, Inrest in pound out How on maturity is 600,000 * 6.104 x - $ 18,300 20 Out How $618,300

6 Convent $600,000 in a (spot) G00,000 1.2015 - 6 499,375.78 Invest in to at 5.50%. 499,375.78 x 5.50 % x - 13,732.84 2 Total = £ 513, 108.614. Convent GMF 513, 108.614 x 10 2241 = $628, 696.25 – ③ Asbitage profit - ① = $9,796.25