Question Details

Limitations of Covered Interest Arbitrage 



1.	Covered Interest Arbitrage in Both Directions. The one year interest rate in New Zealand is 6 percent.  The one year U.S. interest rate is 10 percent.  The spot rate of the New Zealand dollar (NZ$) is $.50.  The forward rate of the New Zealand dollar is $.54.  Is covered interest arbitrage feasible for U.S. investors?  Is it feasible for New Zealand investors?  In each case, explain why covered interest arbitrage is or is not feasible.

2.	Limitations of Covered Interest Arbitrage . Assume that the one-year U.S. interest rate is 11 percent, while the one-year interest rate in Malaysia is 40 percent.  Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 13 percent.  Would covered interest arbitrage be worth considering?  Is there any reason why you should not attempt covered interest arbitrage in this situation?  (Ignore tax effects.)
	


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