Use covered interest arbitrage

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Reference no: EM131508096

You have $1000 to invest. Current spot rate of British pound is £1 = $1.75, 1-year forward rate of pound £1= $1.70, 1-year deposit rate in U.S.= 6%, 1-year deposit rate in Great Britain = 10%.

(a) If you use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars you will have after 1 year?

(b) Based on your calculation, explain where do you want to invest?

Reference no: EM131508096

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