COVERED INTEREST ARBITRAGE
Q.1) Consider the following and calculate the arbitrage gain possible:
€ 1.4528/£ Spot € 1.4538/£ 3 months forward
Interest Rates € 2.15% per annum. £ 4.9% per annum.
(Ans.: Borrow €, gain 7,572 € per million)
Q.2) From the following data calculate the possibilities of gain/loss in arbitrage:
Spot Rate CHF 0.01140
6 months forward rate CHF 0.01138 = JPY 1
Annualized interest rate on 6 months JPY = 0.05%
Annualized interest rate on 6 months CHF = 0.5%
(Ans.: Borrow ¥, gain 4,012 ¥ per million)
Q.3) Given the following data:
Spot Rate: US$ 0.7890 = CAD {Canadian Dollar}
6 months forward rate US$ 0.7850 = CAD
Annualized interest rate on 6 months US$: 2.11 per cent
Annualized interest rate on 6 months CAD: 2.64 per cent
Calculate arbitrage possibilities.
(Ans.: Borrow CAD, gain 2,499 CAD per million)
Q.4) If Euro/USD Spot 0.8125
Euro/USD 0.8135 9 month forward
Euro Interest Rate 2.5% per annum
Dollar Interest Rate 2% per annum
Find Arbitrage possibilities.
(Ans.: Borrow USD, gain 2,498 USD per million)
Q.5) USD/CAD 1.1630, 3 months forward 1.1675. Annualized interest rate CAD 6% – USD 4%.Workout the arbitrage possibilities.
(Ans.: Borrow Foreign (USD) Invest Home (CAD), Gain 10,878)
Q.6) USD/CHF Spot 1.3715
73 days forward USD/CHF 1.3675
CHF interest rate 1.5% per annum
USD interest rate 4.00% per annum
Identify and calculate interest rate, arbitrage if any.
(Ans.: Borrow Home (CHF) and Invest Foreign (USD), Gain 20,602)
Q.7) Given the following data:
Spot rate
6 month forward rate . 42.8020 = $ 1
Annualized interest rate on 6 month rupee 12 percent
Annualized interest rate on 6 month dollar 8 percent
Calculate the arbitrage possibilities.
(Ans.: Borrow Foreign ($) and Invest Home (INR), Gain 164)
Q.8) Spot rate 1.8528 USD per Pound
6 months forward 1.8538 USD per Pound
Interest Rates: USA 4% p.a. Britain 3% p.a.
Workout arbitrage possibilities.
(Ans.: Borrow Foreign (Pound £) and Invest Home (USD), Gain 4,449)
Q.9) USD 1 = INR 42.4210 (Spot rate)
6 month forward rate 43.2300
Annualized interest rate on INR 12%
Annualized interest rate on USD 8%
Find if arbitrage gain is possible and calculate the gain for 1 million. (Mar. 2011)
(Ans.: Borrow Foreign and Gain USD 163 on 1 million USD)
Q.10) USD 1 = EUR 0.7315 (Spot Rate)
3 months forward rate 0.7370
Annualized interest rate on EUR 7%
Annualized interest rate on USD 9%
Find if arbitrage gain is possible and calculate the gain for 1 million. (Oct. 2011)
(Ans.: Borrow Home and Gain EUR 12,688 on 1 million EUR)
Q.11) Given:
Spot
3 months forward : 1 USD = SEK 5.8975
USD interest rate : 4.20% p.a.
SEK interest rate : 6.00% p.a.
Identify and calculate interest rate arbitrage.
(Ans.: Borrow Home and Gain SEK 12,044 on 1 million SEK)
16 Comments