Explore BrainMass

Explore BrainMass

    Risk-free covered interest arbitrage

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 8:50 pm ad1c9bdddf
    https://brainmass.com/business/arbitrage-pricing-theory/risk-free-covered-interest-arbitrage-154656

    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

    The solution describes the transactions for risk-free covered interest arbitrage. Citibank trading rooms in quotations are determined.

    $2.19

    ADVERTISEMENT