BK Inc. has $100,000 that can be used for arbitrage in the forex market. The interest rateis US is 4% and in Europe is 5%. The current exchange rate USD to EUR is 0.87. Thecompany expects that after a year, the exchange rate may not be favourable and executes aforward contract at EUR to USD 1.23. Calculate the net profit or loss of this coveredinterest arbitrage if the investment is made in Europe.Answer Choices:a. The net profit is $8,360.50The net loss is $4,000.00b.c. The net profit is $5,360.50d. The net loss is $1,000.00

Arbitrage Profit - It is the concept which is used to generate income in two or more different…

BK Inc. has $100,000 that can be used for arbitrage in the forex market. The interest ra is US is 4% and in Europe is 5%. The current exchange rate USD to EUR is 0.87. Th company expects that after a year, the exchange rate may not be favourable and executes forward contract at EUR to USD 1.23. Calculate the net profit or loss of this covere interest arbitrage if the investment is made in Europe. Answer Choices: a. The net profit is $8,360.50 b. The net loss is $4,000.00 c. The net profit is $5,360.50

BK Inc. has $100,000 that can be used for arbitrage in the forex market. The interest ra is US is 4% and in Europe is 5%. The current exchange rate USD to EUR is 0.87. Th company expects that after a year, the exchange rate may not be favourable and executes forward contract at EUR to USD 1.23. Calculate the net profit or loss of this covere interest arbitrage if the investment is made in Europe. Answer Choices: a. The net profit is $8,360.50 b. The net loss is $4,000.00 c. The net profit is $5,360.50

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 42QA

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