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Triangular and Covered Interest Arbitrage Analysis

Triangular arbitrage is possible based on the given exchange rates between the DM, $, and FF, which would allow buying one currency, exchanging it, and then exchanging it back for a profit. Covered interest arbitrage is feasible for US investors based on the 180 day forward rate of GBP being lower than implied by interest rate parity using the spot GBP rate and the interest rates in the UK and US.

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Shahnawaz Mirza
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140 views1 page

Triangular and Covered Interest Arbitrage Analysis

Triangular arbitrage is possible based on the given exchange rates between the DM, $, and FF, which would allow buying one currency, exchanging it, and then exchanging it back for a profit. Covered interest arbitrage is feasible for US investors based on the 180 day forward rate of GBP being lower than implied by interest rate parity using the spot GBP rate and the interest rates in the UK and US.

Uploaded by

Shahnawaz Mirza
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

International Finance and Treasury Management Home Assignment 2 Submission date: 19 March 2012 Mode: Mail File Name

(Most important): H2 last three digits of your Roll Number 01. Assume that the following spot exchange rates exist today; DM = $ .60 FF = $ .15 DM = FF 4 Assume no transaction costs. Based on these exchange rates, can triangular arbitrage be used to earn profit? Explain. 02. Assume the following information: Spot rate of GBP = $ 1.60 180 day forward rate of GBP = $ 1.56 180 day British interest rate = 4% 180 day US interest rate = 3% Based on the above information, is covered interest arbitrage by US investors feasible? Explain.

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