Assume the following information: You have $900,000 to invest:
Current spot rate of Australian dollar (A$)
=
$)62
180-day forward rate of the Australian dollar
=
$)64
180-day interest rate in the United States
=
3)5%
180-day interest rate in Australia
=
3)0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
A) $56,903
B) $61,548
C) $27,000
D) $31,500

Question

​Assume the following information: You have $900,000 to invest:
Current spot rate of Australian dollar (A$)
=
$)62
180-day forward rate of the Australian dollar
=
$)64
180-day interest rate in the United States
=
3)5%
180-day interest rate in Australia
=
3)0%
​
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
A) ​$56,903
B) ​$61,548
C) ​$27,000
D) ​$31,500

Quizplus · Accepted Answer

To conduct covered interest arbitrage, we will convert our $900,000 into A$ and invest it in Australia for 180 days. After 180 days, we will convert our investment back into dollars at the forward rate of $)64.

Investment in Australia = $900,000 / $)62 = A$14,516,129.03
Interest earned in Australia = A$14,516,129.03 * 3% * (180/360) = A$217,741.94
Conversion of investment back into dollars = A$14,516,129.03 * $)64 = $928,571.43
Interest earned in the US = $928,571.43 * 3.5% * (180/360) = $16,317.46
Profit = $16,317.46 - ($900,000 * 3%) = $56,903. Therefore, the answer is A.

​Assume the Following Information: You Have $900,000 to Invest

Assume the Following Information: You Have $900,000 to Invest