International Financial Management
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Covered Interest Arbitrage in Both Directions: The following information is available:
? You have $500,000 to invest
? The current spot rate of the Moroccan dirham is $.110.
? The 60-day forward rate of the Moroccan dirham is $.108.
? The 60-day interest rate in the U.S. is 1 percent.
? The 60-day interest rate in Morocco is 2 percent.
a. What is the yield to a U.S. investor who conducts covered interest arbitrage? Did covered
interest arbitrage work for the investor in this case?
b. Would covered interest arbitrage be possible for a Moroccan investor in this case?
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a. The investor may borrow 1 US$ at 1%.
He converts into Moroccan dirham to receive Moroccan dirham 9.0909.
Invest in Moroccan dirham at the rate of 2%, to receive Moroccan dirham 9.2727.
Converts them into US$ under forward contract to receive =9.2727*0.108= ...
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