Question

sume the following information: You have $1,000,000 to invest Current spot rate of pound = $1.30 90 day forward rate of pound = $1.28 3 month deposit rate in U.S. = 3% 3 month deposit rate in Great Britain = 4% If you want to use covered interest arbitrage for a 90 day investment, what will be the amount of U.S. dollars you will have after 90 days? Selected Answer: A. $1,024,000. Answers: A. $1,024,000. B. $1,030,000. C. $1,040,000. D. $1,034,000. E. none of the above.

Answer 1

Correct option is A. $1,024,000

Step-by-step explanation:

given data

Total Amount of Investment = $ 1,000,000

Current spot rate of pound 1 Pound = $1.30

Forward Rate 3 Months = $ 1.28

Deposit rate in US 3 Months = 3 %

Deposit rate in Great Britain 3 Months = 4%

solution

first we will convert $1,000,000 into Pounds by Spot rate

it will be = $1000,000 ÷ 1.30

Amount of Investment = 769230.76923 Pounds

and

now this amount 769230.76923 Pounds invest for 3 month in great Britain at interest rate of 4% so we get interest is

interest = 769230.76923 × 4%

interest = 30769.23076 Pounds

so total realizable value will be

total realizable value = 769230.76923 + 30769.23076

total realizable value = 800,000 Pounds

and that will be in dollar

total realizable value = 800,000 Pounds × $1.28

total realizable value = $1,024,000

so correct option is A. $1,024,000