Assume the following information: British pound spot rate = $1.58 British pound one-year forward rate
Question:
• British pound spot rate = $1.58
• British pound one-year forward rate = $1.58
• British one-year interest rate = 11%
• U.S. one-year interest rate = 9%
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.
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US investors would purchase pounds for 158 in the spot m...View the full answer
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