Question

3. Covered Interest Arbitrage.  Assume the following information:

Spot rate of Mexican peso  = $ .100

1-year Forward rate of Mexican peso  = $ .098

Mexican interest rate  = 8%

US. interest rate  =5%

Show how to identify any arbitrage opportunity based on the Interest Rate Parity (IRP). What is your strategy to achieve your profit? What is your arbitrage profit per $1,000,000 (CIA) ?

Answer 1

Statement of Strategy Today Amount to he Borrowed & Interest charged H.A 1,000,000 50,000 payable (A) $ 1,050,000 M.P. 10,000,000 M.P. 800,000- M:Pa 10,800,000 Converted into Mexican Pesos. = $1,000,000 $ 0.100 [spor) + Interest Canned i Mexcan Peso) 8 % - Total Receipt Converted Back into USA = M. P.10,800,000 X 0.098 (B) Receivable Covered Interest Anbitrage (B-A) $ 1,058.400 $ 8400

Appreciate our Efforts by a LIKE For any doubt or query comment below --------THANK YOU ---------