Purchase Solution

# Covered Interest Arbitrage

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Assume the following information:

Spot Rate today of Swiss franc = \$.60
1-year forward rate as of today for Swiss franc = \$.63
Expected spot rate 1-year from now = \$.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in US dollars = 9%

From the perspective of US investors with \$1,000,000, what would be rate of return under covered interest arbitrage?

##### Solution Summary

Calculates rate of return under covered interest arbitrage.

##### Solution Preview

Assume the following information:

Spot Rate today of Swiss franc = \$.60
1-year forward rate as of today for Swiss franc = \$.63
Expected spot rate 1-year from now = \$.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in US dollars = 9%

From the perspective of US invetors with \$1,000,000, what would be rate of return under covered interest arbitrage?

Covered interest arbitrage:

F/S = ...

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