QUESTION 2 Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is 8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000 credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out covered interest arbitrage (CIA) and compute the profit.
QUESTION 2 Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is 8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000 credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out covered interest arbitrage (CIA) and compute the profit.
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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Transcribed Image Text:QUESTION 2
Mr. Alex, a British arbitrageur, has the following data. The one-year interest rate offered in the UK is
8%, while the one-year interest rate offered in Australia is 5%. The spot rate is £0.3000/AUD. Mr.Alex
is offered a one-year forward contract at £0.312/AUD. He also being offered £120,000 or AUD250,000
credit facility. If Interest Rate Parity (IRP) is not holding, determine how would Mr.Alex carry out
covered interest arbitrage (CIA) and compute the profit.
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