Question

The following is market information: Current spot rate of pound = $1.45 90-day forward rate of...

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?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

According to IRPT,

Forward Rate = Spot Rate * (1+Hi) / ( 1+Fi)

= 1.45 * (1+0.00275) / ( 1+ 0.00325)

= 1.45 * (1.00275) /1.00325

= 1.45 * 0.9995

= 1.449

As IRPT Fwd rate is not equal to actual Fwd rate, There is Arbitrage Gain.

Arbitrage strategy:

COnvert USD into Pound using SPot rate

Amount in Pound = 250000 / 1.45

= 172413.79

Deposit for 90 days in Britain and realize maturity after 90 days

Maturity Value = 172413.79 * 1.00325

= 172974.13

Convert into USD using Fwd rate = 172974.13 * 1.46

= $ 252542.24

Pls do rate, if the answer is correct and comment, if any further assistance is required.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You have $1,000,000 to invest: Current spot rate of pound: $1.30 90-days forward rate of pound...
You have $1,000,000 to invest: Current spot rate of pound: $1.30 90-days forward rate of pound $1.28 3 month deposit rate in U.S 3% 3 month deposit rate in U.K 4% If you covered interest rate arbitrage for a 90 days investment, what will be the amount of U.S dollar you will have after 90 days?                                      
Assume the following information: You have $1,500,000 to invest. Current spot rate of pound = $1.61....
Assume the following information: You have $1,500,000 to invest. Current spot rate of pound = $1.61. 90-day forward rate of pound = $1.57. 3-month deposit rate in U.S. = 2.39%. 3-month deposit rate in U.K. = 5%. Does the covered interest parity hold? If you 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...
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?
Consider the following information available in the Diamond Bank:         Spot Rate for the British Pound Sterling...
Consider the following information available in the Diamond Bank:         Spot Rate for the British Pound Sterling                                                        $1.60         90 – day forward rate of the pound                                                                $1.59         90 – day UK interest rate                                                                                       4%         90 – day U.S. interest rate                                                                                     3% (a)Given this information, would it be a prudent strategy to engage in covered interest arbitrage? Explain (b)If covered interest arbitrage is profitable how much profit would an investor earn if he/she uses $1,000,000? (c)Briefly discuss the realignment process that will...
World Nation Bank offers the following information (ignore bid/ask spreads): Spot rate on Pound = $1.28...
World Nation Bank offers the following information (ignore bid/ask spreads): Spot rate on Pound = $1.28 (US$1.28 / 1GBP)             180 day forward rate on Pound = $1.30 (US$1.30 / 1 GBP) Customers can borrow or deposit US dollars for 180 days at 4% per year (2.0% per 180 days) Customers can borrow or deposit Pounds for 180 days at 3.2% per year (1.6% per 180 days) Suppose a US customer has $100,000, if he deposits the $100,000 in World...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ =...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.59 180-day British interest rate = 4% 180-day U.S. interest rate = 3% Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds ($1 million))? Explain.
Assume the following information: Spot rate of Canadian dollar = $.80 90-day forward rate of Canadian...
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?
Assume the following information:      Spot rate of Mexican peso                    = $0.1      180‑day forward...
Assume the following information:      Spot rate of Mexican peso                    = $0.1      180‑day forward rate of Mexican peso = $0.098      180‑day Mexican interest rate               = 6%      180‑day U.S. interest rate                    = 5% Given this information, is covered interest arbitrage worth­while for Mexican investors who have pesos to invest? Assume you have MXP1,000,000 as your initial investment. Explain your solution.
Covered Interest Arbitrage. Assume the following information: • British pound spot rate = $1.65. • British...
Covered Interest Arbitrage. Assume the following information: • British pound spot rate = $1.65. • British pound one-year forward rate = $1.65 • British one-year interest rate = 12 %. • U.S. one-year interest rate = 10 %. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9 percent. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ =...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.56 180-day British interest rate = 4% 180-day U.S. interest rate= 3% (a) Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds)? Explain. (b) Does interest rate parity exist? Explain. (Please provide detailed answers)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT