Question Details

Explain the concept of covered interest arbitrage 


1.	Covered Interest Arbitrage. Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible.

2.	Covered Interest Arbitrage. Assume the following information:
		Quoted Price
	Spot rate of Canadian dollar 	$.80
	90 day forward rate of Canadian dollar	$.79
	90 day Canadian interest rate	4%
	90 day U.S. interest rate	2.5%

	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.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?




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