Risk-free covered interest arbitrage
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Assume that the Citibank trading room is dealing on the following quotations.
Spot Sterling=$1.5000
Euro-Sterling interest rate (6 months) = 11 percent p.a
Euro-$ interest rate (6 months)= 6 percent p.a
Also assume that Barclays is quoting forward sterling (6 months) at $1.4550
a. describe the transactions you would make to earn a risk-free covered interest arbitrage profits.
b. How much profit would you expect to make?
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Solution Summary
The solution describes the transactions for risk-free covered interest arbitrage. Citibank trading rooms in quotations are determined.
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Assume that the Citibank trading room is dealing on the following quotations.
Spot Sterling=$1.5000
Euro-Sterling interest rate (6 months) = 11 percent p.a
Euro-$ interest rate (6 months)= 6 percent p.a
Also assume that Barclays is quoting forward sterling (6 months) at $1.4550
a. describe the transactions you would make to earn a risk-free covered interest arbitrage profits.
Accoreding to interest ...
Purchase this Solution
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