International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 3IEE
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Finance

The practice of investing in a currency that offers the higher return on a covered basis is known as covered interest arbitrage. Currently, the six month Euro Libor rate is -0.52% per annum, and the six month TR libor rate is 18.06% per annum. If the spot rate is 8.5013TRY per Euro and the forward rates are as stated below,

Forward Points

EURTRY 1M FWD 1003

EURTRY 3M FWD 3411

EURTRY 6M FWD 7096

EURTRY 1Y FWD 14507

a) What is 6M Forward rate for euro?

b) Do you have a covered interest arbitrage opportunity?

c) If yes, how?

d) How much is the arbitrage amount you can enjoy if you can borrow upto 1 million euros or its equivalent Turkish Lira?

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