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5. Assume the following information: ? British p...

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5. Assume the following information: ? British pound spot rate = $1.58 ? British pound one-year forward rate = $1.58 ? British one-year interest rate = 11% ? U.S. one-year interest rate = 9% a. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9% . What would be their net gain (per Dollar) from doing so? b. If a large number of investors undertook this transaction, explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.

 

Paper#11846 | Written in 18-Jul-2015

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