Spot rate (USD/BRL) 5.3900 180-day forward rate (USD/BRL) 5.8510, 180-day U.S. interest rate (p.a.) 1.00%, 180-day Brazilian interest rate (p.a.) 7.00%. Suppose you can mobilize USD 10 million or the equivalent BRL. Is there an arbitrage opportunity? if yes, briefly explain why and discuss how arbitrage activity should affect the spot and forward rates. Hint: calculate the forward rate prescribed by Interest Rate Parity and check if the forward rate is at interest rate

Answer rating: 100% (QA)

To determine if there is an arbitrage opportunity we need to compare the forward exchange rate implied by the interest rate parity IRP with the actual ... View the full answer