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# Covered interest arbitrage, International Fisher effect

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is \$.80. What would be the spot rate forecasted for one year ahead?

) Assume the following information:
You have \$1,000,000 to invest
Current spot rate of pound =\$1.30
90 day forward rate of pound =\$1.28
3 month deposit rate in U.S. = 3%
3 month deposit rate in Great Britain = 4%

If you use covered interest arbitrage for a 90 day investment, what will be the amount of U.S. dollars you will have after 90 days?

Nominal interest rates in Cyprus are 7%, while nominal interest rates in the U.S. are 5%. The spot rate for the Cyprus pound (CYP) is \$1.50. According to the international Fisher effect (IFE), the Cyprus pound should adjust to a new level of:

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1 Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is \$.80. What would be the spot rate forecasted for one year ahead?

Spot rate= \$0.80
1 year discount= 6%
Expected 1 year spot rate= \$0.7520 =94%*0.8