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How much is the covered interest rate arbitrage profit

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Reference no: EM132508865

Interest Rate Parity and Covered Interest Arbitrage

Assume the following information:

Current spot rate of Australian dollar= $.65

Forecasted spot rate of Australian dollar 1 year from now = $.69

1-year forward rate of Australian dollar = $.68

Annual interest rate for Australian dollar deposit = 5%

Annual interest rate in the United States = 8%

?Question 1: According to Interest Rate Parity, is the covered interest arbitrage feasible to U.S. investors and Australian investors? Please explain your answers .

Question 2: Suppose an U.S. investor can borrow up to $500,000 to invest and an Australian investor can borrow up to Australian $800,000 to invest. How much is the covered interest rate arbitrage profit for the U.S. investor and Australian investor if the covered interest arbitrage is feasible to them

Reference no: EM132508865

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