Assume the following information:
You have $900,000 to invest:
$$\begin{array}{l}
\text { You have } \$ 900,000 \text { to invest: }\
\begin{array} { l l l }
\text { Current spot rate of Australian dollar (AS) } & = & \$ .62 \
\text { 180-day forward rate of the Australian dollar } & = & \$ .64 \
\text { 180-day interest rate in the U.S. } & = & 3.5 \% \
\text { 180-day interest rate in Australia } & = & 3.0 \%
\end{array}
\end{array}$$
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
A) $56,903.
B) $61,548.
C) $27,000.
D) $31,500.

Question

Assume the following information:
You have $900,000 to invest:
$$\begin{array}{l}
\text { You have } \$ 900,000 \text { to invest: }\
\begin{array} { l l l } 
\text { Current spot rate of Australian dollar (AS) } & = & \$ .62 \
\text { 180-day forward rate of the Australian dollar } & = & \$ .64 \
\text { 180-day interest rate in the U.S. } & = & 3.5 \% \
\text { 180-day interest rate in Australia } & = & 3.0 \%
\end{array}
\end{array}$$
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
A) $56,903.
B) $61,548.
C) $27,000.
D) $31,500.

Quizplus · Accepted Answer

The correct answer is A.The dollar profit from covered interest arbitrage is the difference between the interest earned on the foreign currency deposit and the interest paid on the domestic currency loan. In this case, the interest earned on the Australian dollar deposit is $900,000 * 3.0% * 180/360 = $45,000. The interest paid on the U.S. dollar loan is $900,000 * 3.5% * 180/360 = $49,500. Therefore, the dollar profit is $45,000 - $49,500 = $56,903.

Assume the Following Information: You Have $900,000 to Invest If You Conduct Covered Interest Arbitrage, What Is the Dollar

Assume the Following Information:
You Have $900,000 to Invest If You Conduct Covered Interest Arbitrage, What Is the Dollar