Assume the following information:

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.
Current spot rate of Australian dollar=$.64
Forecasted spot rate of Australian dollar 1 year from now=$.59
1-year forward rate of Australian dollar=$.62
Annual interest rate for Australian dollar deposit=9%
Annual interest rate in the United States=6%
A)about 6.00
B)about 9.00
C)about 7.33
D)about 8.14
E)about 5.59

Question

Assume the following information:
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Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.
Current spot rate of Australian dollar=$.64
Forecasted spot rate of Australian dollar 1 year from now=$.59
1-year forward rate of Australian dollar=$.62
Annual interest rate for Australian dollar deposit=9%
Annual interest rate in the United States=6%
A)about 6.00
B)about 9.00
C)about 7.33
D)about 8.14
E)about 5.59

Quizplus · Accepted Answer

Covered interest arbitrage involves converting USD to AUD at the spot rate, investing in AUD at 9%, and converting back to USD at the forward rate. The return is calculated as follows: Convert $500,000 to AUD at $0.64 (781,250 AUD), invest at 9% (852,562.5 AUD), convert back at $0.62 (528,588.75 USD). The return is (528,588.75 - 500,000) / 500,000 = 5.59%.

Assume the Following Information