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Covered Interest Arbitrage Profits

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The following interest rate and exchange rates are listed in London:
RUS: 4.6%-5.00%
REUR: 3.00%-3.4%
Spot Rate: EUR/USD 1.2280-1.2295
Forward Rate (1 Year) : EUR/USD 1.2390-1.2410
Assume that you have 10,000,000 EUR or USD 12,280,000 credit line to execute arbitrage. Can you generate covered interest arbitrage profits? What would be your profit?

A. USD147,869

B. EUR 10,427.07

C. EUR23,939

D. Transaction costs does not allow arbitrage!

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Answer: B. EUR 10,427.07

Deposit rate Borrowing rate
Interest rate Bid rate Ask rate Mid rate
USD 4.60% 5.00% 4.80% =(4.6%+5.%)/2
EUR 3.00% 3.40% 3.20% =(3.%+3.4%)/2

Bid Ask Mid rate
Spot rate 1.2280 1.2295 1.2288 =(1.228+1.2295)/2
Forward rate 1.2390 1.2410 1.2400 =(1.239+1.241)/2

Using interest rate ...

Solution Summary

The solution solves a problem on covered interest arbitrage with calculations included in Excel.