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I $ I E S ($/E) F  ($/E) 5% 6% 1.5 1.4985   I $  - annual interest on 1 year US deposit; I E – annual interest on 1 year Euro deposit; S ($/E) – number of dollars per euro, spot F ¼ ($/E) – number of dollars per euro, 1 year forward On the basis of the price criteria:   In which deposit would you invest? In which currency would you borrow? How would you arbitrage to make profit? What is the profit from interest arbitrage per 1000 dollars borrowed?

I $ I E S ($/E) F  ($/E) 5% 6% 1.5 1.4985   I $  - annual interest on 1 year US deposit; I E – annual interest on 1 year Euro deposit; S ($/E) – number of dollars per euro, spot F ¼ ($/E) – number of dollars per euro, 1 year forward On the basis of the price criteria:   In which deposit would you invest? In which currency would you borrow? How would you arbitrage to make profit? What is the profit from interest arbitrage per 1000 dollars borrowed?

Essentials Of Investments
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
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I $

I E

S ($/E)

F  ($/E)

5%

6%

1.5

1.4985

 

I $  - annual interest on 1 year US deposit;

I E – annual interest on 1 year Euro deposit;

S ($/E) – number of dollars per euro, spot

F ¼ ($/E) – number of dollars per euro, 1 year forward

On the basis of the price criteria:

 

  1. In which deposit would you invest?
  2. In which currency would you borrow?
  3. How would you arbitrage to make profit?
  4. What is the profit from interest arbitrage per 1000 dollars borrowed?

 

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