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Serwa Akoto invests regularly on the international market. She has the capacity to borrow GHC10 million...

Serwa Akoto invests regularly on the international market. She has the capacity to borrow GHC10 million or its USA dollar equivalent for arbitrage investment activities. The annual interest rate on the Ghanaian money market is 15 percent per annum and that of the U. S. A is 10 percent per annum. The spot exchange rate between the Ghana cedi (GHC) and U.S. A dollar (US$) is GHC1.75/$ and the three month forward rate is $0.7/GHC.

a. Will Serwa Akoto be indifferent between the Ghanaian market and the USA market? Explain.

b. If she is not indifferent, on what market will she invest her money?

c. Indicate the step through which she can make an arbitrage profit. d. What type of arbitrage is Serwa Akoto involved?

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Answer #1

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The given problem is solved on basis of intrest rate parity theory

a. The independent fair forword rate is 1$= GHC1.7713

b.she advised to invest in GHC

c. Arbitrage profit is $1405357.15 or GHC2007653.07

d. The arbitrage used is called COVERED INTREST ARBITRAGE

please refer above posted images for detailed answers

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