Calculate the certain euro-denominated profit

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Reference no: EM131983898

Suppose that the annual interest rate is 2.47 percent in the United States and 4.25 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $2,750,000 or €1,718,750. If an astute trader finds an arbitrage, what is the net profit in one year?

An Italian currency dealer has good credit and can borrow €937,500 for one year. The one-year interest rate in the U.S. is i$ = 2.19% and in the euro zone the one-year interest rate is i€ = 6.089%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize and calculate the certain euro-denominated profit via covered interest arbitrage:

You are Microsoft's CFO and have an extra U.S. $1B to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.7975% (that's a six month rate, not an annual rate) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥103.732, and the six month forward rate is $1.00 = ¥111.879. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider investing there for six months?

Reference no: EM131983898

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