Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate; RF = foreign country risk-free rate; and RUS = U.S.risk-free rate.
A) $1 * F1 * (1 + RF) /S0- $1 * (1 + RUS)
B) $1 * S0 * (1 + RF) /F1- $1 * (1 + RUS)
C) $1* F1* (1 + RF) /S0 + $1 * (1 + RUS)
D) $1* S0 * (1 + RF) - $1 * (1 + RUS) /F1
E) $1 * S0 * (1 + RF) /F1 + $1 * (1 + RUS)
Correct Answer:
Verified
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