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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 Summary

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

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

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