Assume the following information: Spot rate of Mexican peso $0.100 1-year forward rate of Mexican peso $0.099 1-year Mexican interest rate 6% 1-year U.S. interest rate 5% 1. Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) 2. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
Assume the following information: Spot rate of Mexican peso $0.100 1-year forward rate of Mexican peso $0.099 1-year Mexican interest rate 6% 1-year U.S. interest rate 5% 1. Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) 2. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 17QA
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Assume the following information: Spot rate of Mexican peso $0.100 1-year forward rate of Mexican peso $0.099 1-year Mexican interest rate 6% 1-year U.S. interest rate 5% 1. Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) 2. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
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