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Explain how US investors use covered interest arbitrage

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Reference no: EM132915402

Problem - Covered Interest Arbitrage - Assume the following information:

British pound spot rate = $1.58

British pound one-year forward rate = $1.58

British one-year interest rate = 11 percent

U.S. one-year interest rate = 9 percent

Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9 percent. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.

Reference no: EM132915402

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