Explain how the spot and forward rates of the pound

Reference no: EM13839108

Assume the following information: • British pound spot rate = $1.71 • British pound one-year forward rate = $1.69 • British one-year interest rate = 8% • U.S. one-year interest rate = 5% a. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 5%. What would be their net gain (per Dollar) from doing so? b. If a large number of investors undertook this transaction, explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.

Reference no: EM13839108

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Explain how the spot and forward rates of the pound : Assume the following information: • British pound spot rate = $1.71 • British pound one-year forward rate = $1.69 • British one-year interest rate = 8% • U.S. one-year interest rate = 5% a. Explain how U.S. investors could use covered interest arbitr..

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