Assume the following information:
You have $400,000 to invest
Current spot rate of Sudanese dinar (SDD) = $.00570
90-day forward rate of the dinar = $.00569
90-day interest rate in the U.S.= 4.0%
90-day interest rate in Sudan = 4.2%
If you conduct covered interest arbitrage,what amount will you have after 90 days
A) $416,000.00.
B) $416,800.00.
C) $424,242.86.
D) $416,068.77.
E) none of the above

Question

Quizplus · Accepted Answer

First, calculate the potential profit from the arbitrage:
F=S(1+rd)/(1+rf)
F = $.00570(1+.042/4)/(1+.04/4) = $.0056935
Profit = F – S = $.0056935 – $.00570 = –$.0000065
This negative result means that there is no profit to be made from the arbitrage, and the best choice is D, which is the closest option to the initial investment of $400,000.

Assume the Following Information