Question

Suppose you observe that 90–day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 3%. Further, the spot rate and the 90–day forward rate on the euro are both $1.25.

You have $500,000 that you wish to use in order to engage in covered interest arbitrage.

To start, you exchange your $500,000 for __________.

euros, and deposit the funds in a bank in the eurozone. To lock in the exchange rate (for when you convert the euros back to dollars), you __ a)sell or b)buy_________ euros forward at a forward rate of $1.25.

  

Answer 1

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