(b) Suppose that the current spot exchange rate is 1.5050/ 1.5060/ and the six-month...
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(b) Suppose that the current spot exchange rate is 1.5050/ 1.5060/ and the six-month forward point is 150 160. The interest rate is 5.4% p.a. in Euros and 5.2% p.a. in pounds. Inflation rate in the UK is 1.3% p.a. while 1.4% p.a. in the European Union. Assume that you are a Euro-based investor with 300,000.
Required: Show how you can realize a guaranteed profit from covered interest arbitrage. (12 marks)
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