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Find strategy to profit via covered interest arbitrage

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Reference no: EM132688982

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in the U.K., and that the spot exchange rate is $1.12/£ and the one-year forward exchange rate, is $1.16/£. Assume that an arbitrageur can borrow or lend up to $1,000,000.

A) What is your strategy to profit via covered interest arbitrage and what would your profit be?

B) What should the interest rate in the U.K. be for you to be indifferent between investing in the U.K. or the U.S. for one-year?

Reference no: EM132688982

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