Arbitrage Rule of Thumb: If the difference in interest rates isgreater than the forward premium/discount, or expected change inthe spot rate for UIA, invest in the higher interest yieldingcurrency. If the difference in interest rates is less than theforward premium (or expected change in the spot rate), invest inthe lower yielding currency.
John Duell, a foreign exchange trader at JPMorgan Chase, caninvest $8 million, or the foreign currency equivalent of the bank'sshort term funds, in a covered interest arbitrage with Denmark.Using the following quotes can John Duell make a covered interestarbitrage (CIA) profit? Use also the rule of thumb in answering thequestion.
Spot exchange rate Kr 6.172/$
3-month forward rate Kr 6.198/$
US dollar 3-month interest rate 3%
Danish kroner 3-month interest rate 4.5%
Arbitrage Rule of Thumb: If the difference in interest rates isgreater than the forward premium/discount, or expected change inthe spot rate for UIA, invest in the higher interest yieldingcurrency. If the difference in interest rates is less than theforward premium (or expected change in the spot rate), invest inthe lower yielding currency.
John Duell, a foreign exchange trader at JPMorgan Chase, caninvest $8 million, or the foreign currency equivalent of the bank'sshort term funds, in a covered interest arbitrage with Denmark.Using the following quotes can John Duell make a covered interestarbitrage (CIA) profit? Use also the rule of thumb in answering thequestion.
Spot exchange rate Kr 6.172/$
3-month forward rate Kr 6.198/$
US dollar 3-month interest rate 3%
Danish kroner 3-month interest rate 4.5%