World Nation Bank offers the following information (ignore bid/ask spreads): Spo

Question

World Nation Bank offers the following information (ignore bid/ask spreads): Spot rate on Pound = $1.69 (US$1.69 / 1GBP) 180 day forward rate on Pound = $1.72 (US$1.72 / 1 GBP) Customers can borrow or deposit US dollars for 180 days at 6% per year (3% per 180 days) Customers can borrow or deposit Pounds for 180 days at 4.4% per year (2.2% per 180 days) a) Suppose a US customer has $100,000, if he deposits the $100,000 in World National bank he will have $103,000 at the end of 180 days. If he uses covered interest arbitrage, how many US dollars will he have at the end of 180 days? US dollars from covered interest arbitrage = ___________________ b) Suppose a British customer has 100,000 Pounds, if she deposits the 100,000 Pounds in World National bank she will have 102,000 Pounds at the end of 180 days. If she uses covered interest arbitrage, how many Pounds will she have at the end of 180 days? Pounds from covered interest arbitrage = ________________

Explanation / Answer

a)

b)

Note : All number have been rounded off to nearest integer. Situation a results in an arbitrage profit while Situation b results in a loss.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.