Question

= $1.28 3-month deposit rate in U.S. = 2.25% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have in 90 days?Assume the following information. You have $1,000,000 to invest. Current spot rate of pound = $1.30 90-day forward rate of pound = $1.28 3-month deposit rate in U.S. = 2.25% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have in 90 days?

Answer 1

Answer:

$ 1,024,000

Explanation:

Spot Rate : 1 Pound = $ 1.30

3 Months Forward Rate = $ 1.28

3 Months Deposit rate in US = 2.25%

3 Months Deposit rate in Great Britain = 4%

Total Amount of Investment = $ 1,000,000.

Step 1:

Convert $ 1,000,000 into Pounds using Spot rate (i.e., 1 Pound = $ 1.30).

We will get,

= $1000,000 ÷ 1.30

= 769230.76923 Pounds.

Step 2:

Invest 769230.76923 Pounds in great Britain for 3 months at an interest rate of 4%.

Therefore, we have an interest of 30769.23076 Pounds.

Hence, the total realizable value after 3 months:

=  769230.76923 + 30769.23076

= 800,000 Pounds  

Step 3:

Convert 800,000 Pounds into Dollars using Forward rate (i.e., 1 Pound = $ 1.28).

Therefore, the total amount in Dollars:

= 800,000 Pounds × $ 1.28

= $ 1,024,000