Limitations of Covered Interest Arbitrage
Response to the following problem:
Assume that the 1-year U.S. interest rate is 11 percent, while the 1-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you 1 year from now at a discount of 13 percent. Would covered interest arbitrage be worth considering?
Is there any reason why you should not attempt covered interest arbitrage in this situation? (Ignore tax effects.)