Question

(a) What is interest rate arbitrage?  

(b) If you observe the following rates:   i_c$ = 4%;  i_$ = 3%; S_t = C$1.0150/$ and F_t+6 = C$1.0160/$,

(i) Do these rates offer interest rate arbitrage opportunity?  

            (ii)  If arbitrage opportunity exists, calculate the arbitrage profit.

Answer 1

в с D E 1 2 3 a) interest rate arbitrage is known as the practice of the favorable interest rate differentials and to invest in the higher-yielding currency and also hedging the exchange risk 4 will through a forward currency contrac 6 b) 4% 3% 1.015 C$ 1.016 C$ 1.0200 C$ 8 $ 9 is 10 1$ = 11 Ft + 6 = 12 13 Rate 14 yes arbitage opportunity is available 15 16 Profit 17 18 19 0.0040 C$

в с 1 2 3 a) interest rate arbitrage is known as the practice of the favorable interest rate differentials and to invest in the higher-yielding currency and also hedging the exchange risk 4 will through a forward currency contrac 6 b) 0.04 0.03 1.015 1.016 8 $ 9 i$ 10 1$ = 11 Ft + 6 = 12 13 Rate 14 yes arbitage opportunity is available 15 16 Profit 17 =B10*(1+B8*6/12/(1+B9*6/12) C$ =B13-B11 18 19 20 21