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    Interest Arbitrage

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    Assume the following information:

    Spot rate of Mexican peso =$.100
    180 day forward rate of Mexican peso = $.098
    180 day Mexican interest rate = 6%
    180 day U.S. interest rate=5%

    Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain the answer.

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    Solution Preview

    To answer, begin with an assumed amount of pesos and determine the yield to Mexican investors who attempt ...

    Solution Summary

    This solution calculates the yield to Mexican investors who attempt covered interest arbitrage and explains if it is worthwhile for the investors.