Suppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90-day forward rate on the euro are both $1.60. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. To start, you exchange your $500,000 for (for when you convert the euros back to dollars), you euros, and deposit the funds in a bank in the eurozone. To lock in the exchang euros forward at a forward rate of $1.60.
Suppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90-day forward rate on the euro are both $1.60. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. To start, you exchange your $500,000 for (for when you convert the euros back to dollars), you euros, and deposit the funds in a bank in the eurozone. To lock in the exchang euros forward at a forward rate of $1.60.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter27: Multinational Financial Management
Section: Chapter Questions
Problem 7MC
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![Suppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%.
Further, the spot rate and the 90-day forward rate on the euro are both $1.60.
You have $500,000 that you wish to use in order to engage in covered interest arbitrage.
To start, you exchange your $500,000 for
(for when you convert the euros back to dollars), you
euros, and deposit the funds in a bank in the eurozone. To lock in the exchange rate
euros forward at a forward rate of $1.60.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fee357c8b-34af-454f-99c3-01937923673f%2Fe400f25e-dd82-4f9f-bea2-663b65d1ecf1%2F3qdb42b_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose you observe that 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%.
Further, the spot rate and the 90-day forward rate on the euro are both $1.60.
You have $500,000 that you wish to use in order to engage in covered interest arbitrage.
To start, you exchange your $500,000 for
(for when you convert the euros back to dollars), you
euros, and deposit the funds in a bank in the eurozone. To lock in the exchange rate
euros forward at a forward rate of $1.60.
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