Answered

Join the IDNLearn.com community and start exploring a world of knowledge today. Our community is here to provide the comprehensive and accurate answers you need to make informed decisions.

Given the information:

Interest rate in US (Rh): 7%
Interest rate in Canada (Rh): 5%
Line of credit in US USD 10,000,000
Line of credit in Canada CAD 12,500,000
The spot rate for CAD (S0): $0.80
1-year forward rate for CAD (FR): $0.812


Based on your recommended investment strategy your covered interest arbitrage profit should be:
Group of answer choices

USD 200,000

CAD 250,000

USD 42,500

CAD 52,340

Sagot :

Siddharthadixit757idn

To calculate the covered interest arbitrage profit, we need to follow these steps:

1. Calculate the interest earned in each country:

- In the US: USD 10,000,000*

7% = USD 700,000

- In Canada: CAD 12,500,000 *

5% = CAD 625,000

2. Convert the interest earned in Canada to USD using the spot rate:

- CAD 625,000 * $0.80 = USD 500,000 3. Calculate the forward amount in CAD after one year: - Forward CAD amount = CAD 12,500,000 $0.812 = USD 10,150,000

4. Calculate the total USD received after converting the forward CAD amount:

Total USD = USD 700,000 + USD 500,000 = USD 1,200,000

5. Calculate the profit made from covered interest arbitrage: - Profit = Total USD - USD 10,000,000 = USD 1,200,000 - USD 10,000,000 = USD

Therefore, the covered interest arbitrage profit should be USD 200,000.

Thank you for participating in our discussion. We value every contribution. Keep sharing knowledge and helping others find the answers they need. Let's create a dynamic and informative learning environment together. IDNLearn.com has the solutions to your questions. Thanks for stopping by, and come back for more insightful information.