Question

The following is market information: Current spot rate of pound = $1.23 90-day forward rate of pound = $1.24 3-month deposit rate in U.S. = 1.1% 3-month deposit rate in Great Britain = 1.3% If you have $250,000 and use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

Answer 1

$255308.94 is the amount generated after 90 days

Step-by-step explanation:

Coveered interest arbitrage

Convert dollars to pounds at spot rate

250000/1.23 =£203252.0325

Invest this amount at 1.3% (Britain rate) for 90 days

203252.0325 × 1.013 = £205894.3089

Then convert back to dollars at 90 day forward rate

205894.3089 × 1.24 = $255308.94