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Let's suppose you have $1 million to invest. You are considering to invest in UK...

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Accounting

Let's suppose you have $1 million to invest.

You are considering to invest in UK first, then convert the British Pound back to US$ in the future.

You know the following information:

Annual Interest rate on investment in US: 2%

Annual Interest rate on investment in UK: 1%

Investment period: 1 year

Current exchange rate: 1.52 $/BP

The forward exchange rate which you can apply when converting BP to US$: 1.51 $/BP

What will be the profit or loss if you apply the covered-interest arbitrage?

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