Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid rate 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 U.S. is 6%
The 180-day interest rate in Europe is 8%
-Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?
A) $318,109.10.
B) $330,000.00.
C) $312,218.20.
D) $323,888.90.
E) none of the above

Question

Quizplus · Accepted Answer

SOLUTION:
$\begin{aligned}
\$ 300,000 / \$ 1.10 & = € 277,777.80 \times ( 1.08 ) \
& = € 294,444.40 \times \$ 1.08 \
& = \$ 318,109.10
\end{aligned}$

Exhibit 7-1 Assume the Following Information