Tag Archive for: sulotion

answer Poveide a sulotion with it I don’t want only the answer Suppose that the current spot exc

answer Poveide a sulotion with it I don’t want only the answer Suppose that the current spot exc

answer 
Poveide a sulotion  with it I don't want only the answer 
 
 
 
Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.60/₤. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.
 a) Is covered interest arbitrage feasible in this example? Show your work and explain
 b) Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.