18-7. Interest Rates and Arbitrage. The treasurer of a major U.S. firm has $30 million
to invest for three months. The annual interest rate in the United States is .30 percent
per month. The interest rate in Great Britain is .45 percent per month. The spot
exchange rate is £.59, and the three-month forward rate is £.61. Ignoring
transaction costs, in which country would the treasurer want to invest the company's
If invested in US, the treasurer will get $30*1.009=$30.27 milliom
If invested in GB ...
The problem helps with a problem involving internal rate and arbitrage.