Assume the following information:
$$\begin{array}{l}
\text { You have } \$ 1,000,000 \text { to invest: }\
\begin{array} { l l r }
\text { Current spot rate of pound } & = & \$ 1.60 \
\text { 90-day forward rate of pound } & = & \$ 1.57 \
\text { 3-month deposit rate in U.S. } & = & 3 \% \
\text { 3-month deposit rate in U.K. } & = & 4 \%
\end{array}
\end{array}$$
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?
A) $1,020,500.
B) $1,045,600.
C) $1,073,330.
D) $1,094,230.
E) $1,116,250.

Question

Assume the following information:
$$\begin{array}{l}
\text { You have } \$ 1,000,000 \text { to invest: }\
\begin{array} { l l r } 
\text { Current spot rate of pound } & = & \$ 1.60 \
\text { 90-day forward rate of pound } & = & \$ 1.57 \
\text { 3-month deposit rate in U.S. } & = & 3 \% \
\text { 3-month deposit rate in U.K. } & = & 4 \%
\end{array}
\end{array}$$
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?
A) $1,020,500.
B) $1,045,600.
C) $1,073,330.
D) $1,094,230.
E) $1,116,250.

Quizplus · Accepted Answer

The correct answer is A because the amount of U.S. dollars you will have after 90 days is $1,020,500. This is calculated by taking the current spot rate of pound, which is $1.60, and multiplying it by the 90-day forward rate of pound, which is $1.57. This gives you a value of $1,020,500.

Assume the Following Information If You Use Covered Interest Arbitrage for a 90-Day Investment