Reference no: EM133042158
Question - Suppose that the annual interest rate is 3.4 percent in the United States and 4.2 percent in Germany, and that the EUR/USD spot exchange rate is 1.1039 and the forward exchange rate, with one-year maturity, is 1.1319. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
Assume the following information:
You have $1,000,000 to invest
GBP/USD SPOT rate = 1.2544
GBP/USD 3M FWD rate = 1.2482
3-month deposit rate in U.S. = 3.4% (annual)
3-month deposit rate in Great Britain = 5.2% (annual)
If you move your money to the UK for a 3-month investment and you cover with forward contracts, what will be the amount of U.S. dollars you will have after 3 months (USD, no cents)?
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