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

**SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE**

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.
Which of the following best describes covered interest
arbitrage?
a)Using forward contracts to mitigate default risk, while
attempting to capitalize on equal interest...

Suppose the U.S. 90-day Tbill rate is 5%; the
Euro 90-day simple interest rate is 4.8%. The forward
($/Euro) rate for Euros (to be delivered 90 days
from now) is .6200. What would be a good guess as to what today’s
spot exchange rate must be? Explain.

Given:
US interest rate 5%
German interest rate 3.5%
One-year forward rate is $1.16/Euro
Spot rate $1.12/Euro
Arbitrager can borrow up to $1,000,000 or Euro 892,857. Doing a
Covered Interest Arbitrage (CIA) how much will the arbitrager
make:
Hint: Start by borrowing $1,000,000 and converting this to Euro,
then convert back Euro to USD after one year.

The following is market information:
Current spot rate of pound
=
$1.45
90-day forward rate of pound
=
$1.46
3-month deposit rate in U.S.
=
1.1%
3-month deposit rate in Great Britain
=
1.3%
If you have $250,000 and use covered interest arbitrage for a
90-day investment, what will be the amount of U.S. dollars you will
have after 90 days?

Assume the following information:
Quoted Price
Spot rate of Singapore dollar
$.75
90?day forward rate of Singapore dollar
$.74
90?day Singapore interest rate
4.5%
90?day U.S. interest rate
2.5%
Given this information, what would be the yield (percentage
return) to a U.S. investor who used covered interest arbitrage?
(Assume the investor invests $1,000,000.)
What market forces would occur to eliminate any further
possibilities of covered interest arbitrage?

Currently, interest rate is 2 percent per annum in the U.S. and
6 percent per annum in the euro zone, respectively. The spot
exchange rate is $1.25 = €1.00, and the one-year forward exchange
rate is $1.20 = €1.00. As informed traders recognize the deviation
from IRP and start carrying out covered interest arbitrage
transactions to earn a certain profit, how will IRP be restored as
a result?
A. Interest rate in the euro zone will rise; interest rate in...

Suppose that the annual interest rate is 2.47 percent in the
United States and 4.25 percent in Germany, and that the spot
exchange rate is $1.60/€ and the forward exchange rate, with
one-year maturity, is $1.58/€. Assume that an arbitrager can borrow
up to $2,750,000 or €1,718,750. If an astute trader finds an
arbitrage, what is the net profit in one year?
--------------------------------------------------------------------
An Italian currency dealer has good credit and can borrow
€937,500 for one year. The one-year interest...

Assume the following information:
Spot rate of Canadian dollar =
$.80
90-day forward rate of Canadian dollar
= $.79
90-day Canadian interest rate = 4%
90-day US interest rate = 2.5%
Explain the steps you would use in covered interest arbitrage
with $1 million of your own money (no leverage used).
What would be your profit?

You observe that the EUR/HKD spot exchange rate (i.e., the price
of 1 Euro in terms of Hong Kong Dollars) is 8.91 and the 1-year
EUR/HKD forward exchange rate is quoted at 9.5.(Total 10 marks)
(a) Does an arbitrage opportunity exist given that the
1-year deposit rates in Hong Kong and Europe and are 2.5% and 0.5%,
respectively?
(b) If so, outline an arbitrage strategy and explain
step by step why your strategy yields risk-free profits.

How much arbitrage profit can you obtain with the following
information?
Hint. Covered interest arbitrage
Spot exchange rate: 1.1 Euro / dollar
Forward exchange rate: 1 Euro / dollar
Risk free rate in U.S: 3%
Risk free rate in Europe: 2%

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 18 minutes ago

asked 19 minutes ago

asked 31 minutes ago

asked 59 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago