Top 11 Covered Interest Arbitrage Questions You Need To Solve

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                                       = JPY 1

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.                                                              (Oct. 2007)     

(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.                                         (April 2007)

(Ans.: Borrow Home (CHF) and Invest Foreign (USD), Gain 20,602)

Q.7) Given the following data:

Spot rate                                      42.0010 = $ 1

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.                                                                   (Oct. 2004)

(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.                                                                         (April 2005)

(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                                : 1 USD = SEK 5.8025

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.                                                    (Oct. 2009)

(Ans.: Borrow Home and Gain SEK 12,044 on 1 million SEK)