Make money using covered interest rate arbitrage

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Reference no: EM131536970

You are trying to make money using covered interest rate arbitrage.

You will borrow in USD for one year at 2.25%.

You lend the money in your assigned country/currency (Swedish Kronas) for one year at 4.5%.

You will use the foreign exchange rate as of the date you are completing this assignment for your initial conversion from USD to your assigned foreign currency.

What would the forward rate need to be in order to have no possible arbitrage at the end of the year?

Please show all your work. No work, no points, even if your answer is correct.

Hint: While you can look up (on internet) what the actual forward exchange rate is, this question is asking you to calculate the "no arbitrage forward rate", which is specific to this question. Your calculated forward rate will be different than the looked up forward rate.

Reference no: EM131536970

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