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Will an investor facing the following prices

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Will an investor facing the following prices be able to make money through a covered interest rate arbitrage by borrowing euros or dollars?

Bid Ask Borrowing Lending

S0 $1.40 - €1.00 $1.43-1.00 i$ 4.20%APR 4.10%APR

F0 $1.44 - €1.00 $1.49-1.00 i€ 3.65%APR 3.50%APR

a. Yes, borrow €1,000,000 at 3.65%, trade for $ at bid price spot rate $1.40 = €1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.

b. Yes, borrow at $1,000,000 at 4.2 percent; trade for € at the spot exchange rate $1.43=€1.00; invest €699,300.70 at 3.5 percent; hedge this by going SHORT in forward (agree to sell € @ bid price of $1.44/€ in one year.) Cash Flow in 1 year $237.76

c. No, the transaction costs are too high

d. None of the options

Reference no: EM132396708

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