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 U.S.= 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

Quizplus · Accepted Answer

The correct answer is A because the dollar profit from covered interest arbitrage is $56,903. This is calculated as follows:Spot purchase of A$900,000: $900,000 x 0.62 = $558,000Forward sale of A$900,000: $900,000 x 0.64 = $576,000Interest earned on US$558,000 for 180 days: $558,000 x 0.035 x 180/360 = $9,885Interest paid on A$900,000 for 180 days: $900,000 x 0.03 x 180/360 = $47,015Dollar profit: $576,000 + $9,885 - $558,000 - $47,015 = $56,903

Assume the Following Information