Question

$1$

You are considering uncovered interest arbitrage between the pound$($

GBP

$)$

$$and the US dollar $($Question $1$

You are considering uncovered interest arbitrage between the pound $($GBP$)$ and the US dollar $($USD$).$

The following data is available to you:

Funds available: $2$ million GBP

Spot exchange rate: $1\mathrm{.}40$ USD per GBP

Spot exchange rate one year ago: $1\mathrm{.}26$ USD per GBP

USD $3$ month interest rate: $2\mathrm{.}32\%$

GBP $3$ month interest rate: $0\mathrm{.}75\%$

a$)$ Calculate the profit that would be made if the exchange rate remains at its current level in $3$

months' time.

b$)$ How would the profit figure change if the US dollar continues to weaken at the same rate as it has

done over the previous year?

USD

$)$

$.$

$$The following data is available to you:

Funds available:

$2$

$$million GBP

Spot exchange rate:

$1$

$.$

$4$

$0$

$$USD per GBP

Spot exchange rate one year ago:

$1$

$.$

$2$

$6$

$$USD per GBP USD

$3$

$$month interest rate:

$2$

$.$

$3$

$2$

$\%$

GBP

$3$

$$month interest rate:

$0$

$.$

$7$

$5$

$\%$

Required:

a

$)$

$$Calculate the profit that would be made if the exchange rate remains at its current level in

$3$

$$months

$$

$$time$.$

b

$)$

$$How would the profit figure change if the US dollar continues to weaken at the same rate as it has done over the previous year?