What if the direction is the opposite

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Reference no: EM131619462

Consider a hypothetical situation with the following information:

Spot Rate of Canadian dollar: $0.76

180-day forward rate of Canadian dollar: $0.85

180-day Canadian interest rate: 4%

180-day US interest rate: 4.5%

Given the information above, compute the 180-day net yield to the investor who carries out a covered interest arbitrage.

PS: I would like to share with you some class notes that might be helpful:

Suppose that ih – if < P. Then, the net yield from the covered interest arbitrage is given by (if + P) – ih.

What if the direction is the opposite? Suppose that ih – if > P i.e. ih > if +P. Then, the net yield from the foreigners point of view will be ih – (if + P).

Reference no: EM131619462

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