Bank One and Bank ENN Interest Rates: Arbitrage Opportunity
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Suppose Bank One offers a risk free interest rate of 5.5% on both savings and loans and Bank ENN offers a risk free interest rate at 6% on both savings and loans.
a) What arbitrage opportuity is available?
b) Which bank would experience a surge in the demand for loan? Which bank would receive a surge in deposit.
c) What would you expect to happen to the interest rate the two banks are offering?
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Solution Summary
The expert examines the arbitrage opportunity for Bank One and Bank ENN interest rates.
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a. You can borrow money from Bank One, and deposit the money that you borrowed at Bank ENN, you make ...
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