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Risk-free covered interest arbitrage

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?

Solution Preview

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 ...

Solution Summary

Describes the transactions for risk-free covered interest arbitrage

$2.19