# 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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#### Solution Preview

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

Answer: $0.7520

2 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 ...

#### Solution Summary

Answers to questions that ask for the calculation of forecasted spot rate using Covered interest arbitrage, International Fisher effect.