Determine whether triangular arbitrage is feasible

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Reference no: EM131869119

Spot rate of £ = $1.596

Spot rate of Australian dollar (A$) = $.70

Cross exchange rate: £1 = A$2.28

One-year forward rate of A$ = $.71

One-year forward rate of £ = $1.58004

One-year U.S. interest rate = 8.00%

One-year British interest rate = 9.09%

One-year Australian interest rate = 7.00%

1) Determine whether triangular arbitrage is feasible, and if so, how it should be conducted to make a profit.

- Triangular arbitrage is not feasible because the cross exchange rate between £ and A$ is properly specified:

Proper cross exchange rate = spot rate of £/spot rate of A$ = $1.596/$.7 = 2.28

2) Using the information in question 1, determine whether covered interest arbitrage is feasible between Pound and US$, and between A$ and US$. Furthermore if so, how you should be conducted to make a profit and how much would you make with one million US dollars?

Reference no: EM131869119

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