Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid quote for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the United States is 6%
The 180-day interest rate in Europe is 8%
-Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have aFter 180 days?

Question

Quizplus · Accepted Answer

1. We convert the $300,000 to euros by dividing it by the spot bid quote: 
   €277,777.78 = $300,000 ÷ $1.08
2. We then invest the euros in Europe for 180 days, earning interest at a rate of 8%: 
   €299,999.98 = €277,777.78 x (1 + 0.08 x 180/360)
3. We simultaneously sell the euros forward for dollars at the 180-day forward bid rate of $1.08: 
   $323,999.97 = €299,999.98 x $1.08/€
4. We invest the dollars in the US for 180 days, earning interest at a rate of 6%: 
   $343,359.96 = $323,999.97 x (1 + 0.06 x 180/360)
5. At maturity, we receive our principal plus interest in dollars from the US investment, which we use to buy back euros at the previously agreed forward rate of $1.08: 
   €318,109.10 = $343,359.96 ÷ $1.08

Therefore, our final amount after 180 days of covered interest arbitrage is €318,109.10.

Exhibit 7-1 Assume the Following Information