Covered interest arbitrage (CIA) opportunities hold, when interest rate differential between two countries and forward premium/discount...

 

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Covered interest arbitrage (CIA) opportunities hold, when interest rate differential between two countries and forward premium/discount are not same. Suppose that three-month interest rates (annualized) in the UK and the United States are 3 percent and 5.5 percent, respectively. The spot and forward rates between £ and $ are such that British pound is selling at a premium of 2 percent in the forward market. Based on this information, you should advise your boss to 1) borrow from the US and invest in the UK to make arbitrage profit 2) borrow from the UK and invest in the US to make arbitrage profit 3) do nothing as there is no arbitrage opportunities 4) do nothing as there is not enough information to make a decision on CIA Covered interest arbitrage (CIA) opportunities hold, when interest rate differential between two countries and forward premium/discount are not same. Suppose that three-month interest rates (annualized) in the UK and the United States are 3 percent and 5.5 percent, respectively. The spot and forward rates between £ and $ are such that British pound is selling at a premium of 2 percent in the forward market. Based on this information, you should advise your boss to 1) borrow from the US and invest in the UK to make arbitrage profit 2) borrow from the UK and invest in the US to make arbitrage profit 3) do nothing as there is no arbitrage opportunities 4) do nothing as there is not enough information to make a decision on CIA

Answer rating: 100% (QA)

3 do nothing as there is no arbitrage opportunities Explanation ... View the full answer