Assume the following information:

You have $1,000,000 to invest:

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have aFter 90 days?
Current spot rate of pound
=$1)30
90-day forward rate of pound
=$1)28
3-month deposit rate in United States
=3%
3-month deposit rate in Great Britain
=4%
A)$1,024,000.
B)$1,030,000.
C)$1,040,000.
D)$1,034,000.
E)none of the above

Question

Assume the following information:
​
You have $1,000,000 to invest:
​
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have aFter 90 days?
Current spot rate of pound
=$1)30
90-day forward rate of pound
=$1)28
3-month deposit rate in United States
=3%
3-month deposit rate in Great Britain
=4%
A)$1,024,000.
B)$1,030,000.
C)$1,040,000.
D)$1,034,000.
E)none of the above

Quizplus · Accepted Answer

To use covered interest arbitrage, convert $1,000,000 to pounds at the spot rate ($1.30), invest at the UK rate (4% for 3 months), then convert back to dollars at the forward rate ($1.28). The calculation is: ($1,000,000 / 1.30) * (1 + 0.04/4) * 1.28 = $1,024,000.

Assume the Following Information