Interest Rate Arbitrage You observe the following spot and 1-year forward exchange rates...
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Finance
Interest Rate Arbitrage
You observe the following spot and 1-year forward exchange rates between the U.S. Dollar (USD) and Mexican Peso (MXN). You additionally observe U.S. and Mexican 1-year borrowing and lending rates. Note that the borrowing rate and lending rate refers to the interest earned from a bank deposit and the interest paid on loan from a bank, respectively. USD/MXN Spot 1-Year Forward Bid 20.3786 20.3738 Ask 20.3819 20.3788 1-Year Interest Rate United States Mexico Borrowing 1.13% 5.44% Lending 3.25% 6.02% 1. (7 Points) Find and describe the arbitrage opportunity, if any. 2. (3 Points) Explain why your strategy is risk-free
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