The following situation is observed in the money markets.
Sterling: US dollar exchange rates:
......................................Spot......................$1.6550-1.6600
......................................Forward (1 Year)......$1.6300-1.6450
Interest rates (fixed):.............New York....................5½%-5¼%
.......................................London........................5¾%-5⅝%
(a) Calculate both the interest and the exchange agios.
(b) Using the figures provided, investigate whether an arbitrageur operating in London could profit from covered interest arbitrage.
Notes:
(a) Assume he borrows £100,000.
(b) You may ignore commission and transaction costs other than the spreads.