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The three-month dollar interest rate in New York is 3% per annum Alternatively the three-month euro interest rate in Frankfort

The three-month dollar interest rate in New York is 3% per annum. Alternatively, the three-month euro interest rate in Frankfort is 5% p.a. The current $/€ spot exchange rate is $1.1340/€. The euro three-month forward rate is quoted at $1.1326/€.

  1. Show how a U.S. arbitrageur would exploit a possible covered interest arbitrage opportunity with a nominal $80,000,000. Don’t start with the formula. Explain in your own words the transactions the arbitrageur would execute and calculate the profit/loss the arbitrager would make or face.

Jan 31 2020 View more View Less

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