How us investors could use covered interest arbitrage

Reference no: EM131231210

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: EM131231210

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