Suppose the interest rate on £ is 12% in London, and the interest  rate on a comparable dollar investment in New York is 7%. The £ spot rate is $1.75 and the one-year forward rate is $ 1.68. Are there opportunities for covered interest arbitrage? Illustrate the profits associated with covered interest arbitrage by showing the steps that an arbitrageur can take to profit from the discrepancy in rates based on $1,000,000 transaction. Assume that the borrowing and lending rates are identical and the bid-ask spread in the spot and forward market is zero.

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Answer There is a profit of 5200 with covered nterest arbirtage strategy Stepbystep ... View the full answer