Emily Karlsen is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.) Spot exchange rate in Sydney: $A1.1764/$US 6-month forward rate in Sydney: $A1.2575/$US U.S. dollar interest rate: 5.0 percent per annum Australian dollar interest rate: 7.0 percent per annum In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Emily Karlsen could make (annualized rate of return over her initial investment).
Emily Karlsen is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.) Spot exchange rate in Sydney: $A1.1764/$US 6-month forward rate in Sydney: $A1.2575/$US U.S. dollar interest rate: 5.0 percent per annum Australian dollar interest rate: 7.0 percent per annum In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Emily Karlsen could make (annualized rate of return over her initial investment).
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
Problem 1PS
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Emily Karlsen is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.)
|
Spot exchange rate in Sydney: |
$A1.1764/$US |
|
6-month forward rate in Sydney: |
$A1.2575/$US |
|
U.S. dollar interest rate: |
5.0 percent per annum |
|
Australian dollar interest rate: |
7.0 percent per annum |
- In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Emily Karlsen could make (annualized
rate of return over her initial investment).
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