3) Imagine that you can borrow or lend at a risk-free rate of 3.20% in the...

 

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3) Imagine that you can borrow or lend at a risk-free rate of 3.20% in the US, and you can borrow or lend at a risk-free rate of 4.55% in Europe. You have $500,000 to invest for one-year. The exchange rate is: 1.0000 USD = 0.9372 EUR. a. Is there a covered interest arbitrage opportunity? b. If so, how much (in USD) can you profit? c. Explain what you would do to exploit a mispricing. d. What would the one-year futures contract FX rate have to be (approximate out to 4 decimals) to eliminate the arbitrage opportunity? 3) Imagine that you can borrow or lend at a risk-free rate of 3.20% in the US, and you can borrow or lend at a risk-free rate of 4.55% in Europe. You have $500,000 to invest for one-year. The exchange rate is: 1.0000 USD = 0.9372 EUR. a. Is there a covered interest arbitrage opportunity? b. If so, how much (in USD) can you profit? c. Explain what you would do to exploit a mispricing. d. What would the one-year futures contract FX rate have to be (approximate out to 4 decimals) to eliminate the arbitrage opportunity?

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a Covered interest arbitrage opportunity exists if the potential profit from investing in one countr... View the full answer