covered interest arbitrage

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

HJ, an abitrager with Bank of Montreal, faces the following CAD/USD prices;
Spot: CAD 1.49/USD
6M Forward: CAD 1.51/USD
6M CAD interest rate 7.5% per annum
6M USD interest rate 5.0% p.a.
H.J is authorized to use CAD20,000,000 or its USD equivalent. The ending profit, if any, should be realized in CAD. How can he complete interest arbitrage? What will be his profit?

© BrainMass Inc. brainmass.com December 24, 2021, 5:06 pm ad1c9bdddf
https://brainmass.com/economics/contracts/covered-interest-arbitrage-28197

Solution Preview

Day 0: Do the following transactions
1. Borrow CAD 20 million at the rate of 7.5% for 6 days
2. Sell CAD 20 million in spot market to buy USD
The amount of USD received = 20.0 Million / Exchange rate = 20.0 Million / 1.49 = 13.422819 million USD

3. Invest the proceeds from sale of CAD in US Bank for 180 days ...

Solution Summary

A discussion of covered interest arbitrage ensues.

$2.49