Suppose the interest rate on investments in GBP is 12% in London and the interest rate for comparable investments in USD in New York is 7%. Suppose further, that the spot rate is USD 1.95 /GBP and that the one-year forward rate is USD 1.87 /GBP a) Is the covered interest parity violated? Is there an arbitrage opportunity? b) If yes, how high is it if you were able to borrow USD 1 million from a US-based bank?

Suppose the interest rate on investments in GBP is 12% in London and the interest rate for comparable investments in USD in New York is 7%. Suppose further, that the spot rate is USD 1.95 /GBP and that the one-year forward rate is USD 1.87 /GBP a) Is the covered interest parity violated? Is there an arbitrage opportunity? b) If yes, how high is it if you were able to borrow USD 1 million from a US-based bank?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 33QA

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