a) Can you make money off of this ???? b) What are the effects of covered interest arbitrage? c) Calculation of % premium or discount. Premium or discount size should be equal to but opposite in sign to interest rate difference. d) [(Fwd-Spot)/Spot] X 12/n X 100 =% premium or discount Use this formula with direct rates (units of local currency per one unit of foreign) Indirect rates are units of foreign currency per one unit of local currency. (be Careful this is a common mistake on exams)
a) Can you make money off of this ???? b) What are the effects of covered interest arbitrage? c) Calculation of % premium or discount. Premium or discount size should be equal to but opposite in sign to interest rate difference. d) [(Fwd-Spot)/Spot] X 12/n X 100 =% premium or discount Use this formula with direct rates (units of local currency per one unit of foreign) Indirect rates are units of foreign currency per one unit of local currency. (be Careful this is a common mistake on exams)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Covered Interest Arbitrage Problems
4. Taking advantage of the "carry trade"
Example:
You have $1,000,000.
Interest Rates:
One year Govt debt
Mexico
USA
Spot rate=9.5 pesos/$
Rate
7%
1%
Forward Rate = 10 pesos/$
a) Can you make money off of this ????
b) What are the effects of covered interest arbitrage?
c) Calculation of % premium or discount. Premium or discount size should be equal
to but opposite in sign to interest rate difference.
d) [(Fwd-Spot)/Spot] X 12/n X 100 = % premium or discount
Use this formula with direct rates (units of local currency per one unit of foreign)
Indirect rates are units of foreign currency per one unit of local currency. (be
Careful this is a common mistake on exams)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F92abe051-1abe-454a-9594-6ccb08c4b0a8%2F366cb1fe-a964-4503-be18-801ba8a5c0a6%2Fpoedaa4_processed.png&w=3840&q=75)
Transcribed Image Text:Covered Interest Arbitrage Problems
4. Taking advantage of the "carry trade"
Example:
You have $1,000,000.
Interest Rates:
One year Govt debt
Mexico
USA
Spot rate=9.5 pesos/$
Rate
7%
1%
Forward Rate = 10 pesos/$
a) Can you make money off of this ????
b) What are the effects of covered interest arbitrage?
c) Calculation of % premium or discount. Premium or discount size should be equal
to but opposite in sign to interest rate difference.
d) [(Fwd-Spot)/Spot] X 12/n X 100 = % premium or discount
Use this formula with direct rates (units of local currency per one unit of foreign)
Indirect rates are units of foreign currency per one unit of local currency. (be
Careful this is a common mistake on exams)
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