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Currently the spot exchange rate is 150pound and the

Covered Interest Arbitrage

Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The interest rate is 8.0% per year in the U.S. and 5.8% per year in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000. How would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

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Finance Basics: Currently the spot exchange rate is 150pound and the

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