Question

11) (6 pts) World Nation Bank offers the following information (ignore bid/ask spreads: Spot rate on Euro 90 day forward rate on Euro Customers can borrow or deposit US dollars for 90 days at an annualized rate of 3.6% per year (0.9% per 90 days) Customers can borrow or deposit Euros for 90 days at a 1.2% per year (0.3% per 90 days) $1.118 (US$1.118/1EUR) $1.129 (US$1.129/1EUR) n annualized rate of Suppose a European investor has 100,000 Euros,if they deposit the 100,000 Euros in World ational bank they will have 100,300 Euros at the end of 90 days. If they use covered interest arbitrage, how many Euros will they have at the end of 90 days? s the European investor better Euros from covered interest arbitrage off or worse off using covered interest arbitrage? What is the Euro amount the European investor is Better off or Worse off?

Answer 1

SOLUTION ex plo It involves the Use o lock inaqainstexchange sate isk Conver EURO looooo into to t.li& 111800 enters into a on Da 9o I.1 29 Invest 4111800 @)-0.9% Cre- 4 112806.20 fomn esment Selli 1.129to aet EUPO H is WORSE OFF USiyn the arsbiage y EUPo 383 (I00300-99