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    covered interest arbitrage

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    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

    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.