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2. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $.100 180day forward rate...

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Finance

2. Covered Interest Arbitrage.Assume the following information:

Spot rate of Mexican peso = $.100

180day forward rate of Mexican peso = $.099

180day Mexican interest rate = 6%

180day U.S. interest rate = 4%

Given this information, is covered interest arbitrageworth­while for Mexican investors who have pesos to invest? Explainyour answer. Assume you have 1,000,000 Pesos to invest (MXP).

SHOW WORK

Answer & Explanation Solved by verified expert
3.8 Ratings (665 Votes)
Let us assume that the arbitrager has take a loan of 1000000 pesos from bank 6 for 180 days As nothing is clearly mentioned in the question we assume rates are for 180    See Answer
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Transcribed Image Text

2. Covered Interest Arbitrage.Assume the following information:Spot rate of Mexican peso = $.100180day forward rate of Mexican peso = $.099180day Mexican interest rate = 6%180day U.S. interest rate = 4%Given this information, is covered interest arbitrageworth­while for Mexican investors who have pesos to invest? Explainyour answer. Assume you have 1,000,000 Pesos to invest (MXP).SHOW WORK

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