Suppose that you are working for ANZ Bank as a foreign exchange trader and are currently exploring the opportunity of engaging a cover interest arbitrage possibility. You can invest New Zealand Dollar (NZD) 10,000 or British pound (GBP) 10,000. You faced the following exchange rate and interest rate quotes. Sport rate (NZD/GBP) 2.7450-2.7550 One-year forward rate (NZD/GBP) One-year New Zealand 2.6450-2.6550 Interest rate 7.75%-8.25% One-year British interest Rate 3.75%-4.25% a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of NZD and determine the arbitrage profit/losses. b) Assume that you want to realize in term of GBP. Show the CIA process and determine the arbitrage profit/losses
Suppose that you are working for ANZ Bank as a foreign exchange trader and are currently exploring the opportunity of engaging a cover interest arbitrage possibility. You can invest New Zealand Dollar (NZD) 10,000 or British pound (GBP) 10,000. You faced the following exchange rate and interest rate quotes. Sport rate (NZD/GBP) 2.7450-2.7550 One-year forward rate (NZD/GBP) One-year New Zealand 2.6450-2.6550 Interest rate 7.75%-8.25% One-year British interest Rate 3.75%-4.25% a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of NZD and determine the arbitrage profit/losses. b) Assume that you want to realize in term of GBP. Show the CIA process and determine the arbitrage profit/losses
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 17QA
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