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 is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?
A) 7.96%; feasible
B) 6.04%; feasible
C) 6.04%; not feasible
D) 4.07%; not feasible
E) 10.00%; feasible

Question

Quizplus · Accepted Answer

SOLUTION:
$318,109.10/$300,000 -1 = 6.04%. Since this rate is slightly higher than the U.S. interest rate of 6%, covered interest arbitrage is feasible.

Exhibit 7-1 Assume the Following Information