Answered

Given the information:

Interest rate in US (Rh): 7%
Interest rate in Canada (Rh): 5%
Line of credit in US USD 10,000,000
Line of credit in Canada CAD 12,500,000
The spot rate for CAD (S0): $0.80
1-year forward rate for CAD (FR): $0.812


Based on your recommended investment strategy your covered interest arbitrage profit should be:
Group of answer choices

USD 200,000

CAD 250,000

USD 42,500

CAD 52,340



Answer :

siddharthadixit757

To calculate the covered interest arbitrage profit, we need to follow these steps:

1. Calculate the interest earned in each country:

- In the US: USD 10,000,000*

7% = USD 700,000

- In Canada: CAD 12,500,000 *

5% = CAD 625,000

2. Convert the interest earned in Canada to USD using the spot rate:

- CAD 625,000 * $0.80 = USD 500,000 3. Calculate the forward amount in CAD after one year: - Forward CAD amount = CAD 12,500,000 $0.812 = USD 10,150,000

4. Calculate the total USD received after converting the forward CAD amount:

Total USD = USD 700,000 + USD 500,000 = USD 1,200,000

5. Calculate the profit made from covered interest arbitrage: - Profit = Total USD - USD 10,000,000 = USD 1,200,000 - USD 10,000,000 = USD

Therefore, the covered interest arbitrage profit should be USD 200,000.

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