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Calculate the principal and interest gained from investing

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Question - James, a foreign exchange trader in US, can invest 8,000,000 USD, or the foreign currency equivalent of the bank's short-term funds, in a covered interest arbitrage with UK. Using the following quotes, answer the questions of parts a, b, and c.

Assumptions

Value

Arbitrage funds available

8,000,000 USD

Spot exchange rate (GBP/$)

7.1720

3-month forward rate (GBP/$)

7.1980

US dollar 3-month interest rate

4.000%

UK Pound 3-month interest rate

6.000%

Required -

1. Calculate the principal and interest gained from investing in US bank?

2. Calculate the principal and interest gained from investing in UK bank?

3. Can James make covered interest arbitrage (CIA) profit?

Reference no: EM133128188

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