Assume the following information:You have $1,000,000 to invest:Current spot rate of pound=$1.3090-day forward rate of pound=$1.283-month deposit rate in United States=3%3-month deposit rate in Great Britain=4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? $1,024,000 $1,030,000 $1,040,000 $1,034,000
Question
Assume the following information:You have 1.3090-day forward rate of pound=1,024,000 1,040,000 $1,034,000
Solution
To solve this problem, we need to follow these steps:
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Convert the 1,000,000 / $1.309 = £763,358.59
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Invest this amount in Great Britain for 90 days at a 4% annual interest rate. To find the interest for 90 days, we need to divide the annual interest rate by 4 (since 90 days is a quarter of a year). So, the interest rate for 90 days is 4% / 4 = 1%. The amount after 90 days will be £763,358.59 * 1.01 = £771,192.18
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Convert this amount back to U.S. dollars using the 90-day forward rate: £771,192.18 * 987,125.99
So, the amount of U.S. dollars you will have after 90 days is $987,125.99. This is not one of the options provided, so there may be a mistake in the problem or in the options provided.
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