Please indicate which currency pair provides the greatest opportunity for a covered interest arbitrage? Which...
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Finance
Please indicate which currency pair provides the greatest opportunity for a covered interest arbitrage? Which currency pair provides the least opportunity?
Assume you can borrow or lend $1 million at the given interest rate in all countries, and enter both spot and forward exchange market. Can you come up with a plan and make money using the currency pair whose LHS and RHS differ the most?
Verification of Covered Interest Arbitrage
Examples
Market data as of April 6/7, 2015:
1
2
3
Country
USA
Japan
UK
Euro Zone
Exchange ratio
JPY per USD
USD per GBP
USD per EUR
Spot exchange rate, R
119.5000
1.4889
1.0936
3-month Forward exchange rate, F
119.3400
1.4879
1.0949
3-month interest rate (annualized)
0.27375%
0.10071%
0.57025%
0.00857%
In Percentages
LHS
0.04326%
-0.07413%
0.06630%
RHS
-0.13389%
-0.06716%
0.11887%
Difference (Absolute value)
0.177150%
0.006970%
0.052570%
Answer & Explanation
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