Suppose that the current spot exchange rate is 0.98/$ and the six-month forward exchange rate is...

 

 
 

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Suppose that the current spot exchange rate is €0.98/$ and the six-month forward exchange rate is €0.9712/$. The six-month interest rate is 2.11 percent per annum in the United States and 4.92 percent per annum in France. Assume that you can borrow up to $1,000,000 or € 980,000. a) Show the steps until you can create a profit via covered interest arbitrage in U.S. dollars. b) Repeat the above of (a) but you would create a profit in euro euros. Suppose that the current spot exchange rate is €0.98/$ and the six-month forward exchange rate is €0.9712/$. The six-month interest rate is 2.11 percent per annum in the United States and 4.92 percent per annum in France. Assume that you can borrow up to $1,000,000 or € 980,000. a) Show the steps until you can create a profit via covered interest arbitrage in U.S. dollars. b) Repeat the above of (a) but you would create a profit in euro euros.

Answer rating: 100% (QA)

a Step 1 Borrow 1000000 in the US at 211 pa Step 2 Exchange the borrowed money a... View the full answer