Realignment process that will yield interest rate parity

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Reference no: EM131990869

Consider the following information available in Diamond Bank located in a neighborhood near you.

Spot Rate for the British Pound Sterling $1.60

90 – day forward rate of the pound $1.59

90 – day UK interest rate 4%

90 – day U.S. interest rate 3%

(a) Given this information, would it be a prudent strategy for Diamond Bank to engage in covered interest arbitrage? Explain.

(b) If covered interest arbitrage is profitable how much profit would the Bank earn if it uses $1,000,000?

Reference no: EM131990869

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