A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The one-year interest rate in the U.S. is is = 6% and in the euro zone the one-year interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered interest arbitrage. Group of answer choices Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ = 2%; translate euro proceeds
A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The one-year interest rate in the U.S. is is = 6% and in the euro zone the one-year interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered interest arbitrage. Group of answer choices Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ = 2%; translate euro proceeds
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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Transcribed Image Text:A Polish currency dealer has good credit and can borrow either
€1,600,000 or $2,000,000 for one year. The one-year interest
rate in the U.S. is is = 6% and in the euro zone the one-year
interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00
and the one-year forward exchange rate is $1.25 = €1.00. Show
how you can realize a certain euro profit via covered interest
arbitrage.
Group of answer choices
Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at
the spot rate; invest euros at i€ = 2%; translate euro proceeds
back to dollars at the forward rate of $1.25 = €1.00 for gross
proceeds of $2,125,000. Net profit will be $5,000.
Borrow $2,000,000 at 6%; trade $2,000,000 for €800,000 at the
spot rate; invest euros at i€ = 2%; translate euro proceeds back
to dollars at the forward rate of $1.20 = €1.00. Net profit will be
$17,600.
Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the
spot rate, invest dollars in the U.S. at i$= 6% for one year;
translate dollars back to $2,000,000 at the forward rate of $1.20
= €1.00. Net profit will be €2,000.
Arbitrage opportunity does not exit
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