Guaranteed profit from covered interest arbitrage

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Reference no: EM131933606

1) Suppose that the current spot exchange rate is €1.46/£ and the six-month forward exchange rate is €1.50/£. The one-year interest rate is 5.25% in euros and 5% in pounds.

a) Assume you have €25 million to invest, what is the guaranteed profit from covered interest arbitrage?

b) Explain the steps necessary to realize your guaranteed profit.

Reference no: EM131933606

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