The current spot exchange rate is €0.70/$ and the six-month forward exchange rate is €0.724/$. The six-month interest rate is 4.60 percent per annum in the United States and 4.40 percent per annum in France. You can borrow up to $500,000 or €400,000 a. Show how you can realize profit via covered interest arbitrage. What is the size of your arbitrage profit [4]
The current spot exchange rate is €0.70/$ and the six-month forwardexchange rate is €0.724/$. The six-month interest rate is 4.60 percent per annum in the United States and 4.40 percent per annum in France. You can borrow up to $500,000 or €400,000
a. Show how you can realize profit via covered interest arbitrage. What is thesize of your arbitrage profit [4]
b.Explain how the IRP will be restored as a result of covered arbitrage activities. [1 MARKS]
