Purchase Solution

covered interest arbitrage

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution

Solution Summary

A discussion of covered interest arbitrage ensues.

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 ...

Purchase this Solution


Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.