Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spot exchange rate is 19.780 Pesos per dollar and the one-year forward rate is €19.790 per dollar. The investor does not wish to bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.

Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spot exchange rate is 19.780 Pesos per dollar and the one-year forward rate is €19.790 per dollar. The investor does not wish to bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter21: International Cash Management

Section: Chapter Questions

Problem 3ST

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