Business, 24.05.2021 16:20 luluhawkins

Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.60/₤. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i. e., ₤666,667, at the current spot exchange rate. Assume that you are a euro-based investor. Show how you can realize a guaranteed profit from covered interest arbitrage and determine the size of the arbitrage profit by answering the following questions:
What will be your total debt in one year?
After using the borrowed money and make an investment in another market, how much is your arbitrage profit?

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Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1....

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