1. • Suppose the spot rate between Euro and
USD is 0.8700 USD per Euro. 90-day
forward is 0.8500.Dollars can be lent or
borrowed at a rate of 5% p.a while the rate
for euro deposits or loans is 8%p.a. Is
there an opportunity for arbitrage?

2. Covered Interest Arbitrage
• Borrow 100 Euros @ 8%p.a
• Convert into USD spot 100x0.87 =$87
• Deposit $87 for 90 days @ 5%p.a =
$88.0875
• Convert it to Euro forward
=88.0875/.85=103.63
• Repay Euro loan = 102.00
• Arbitrage profit = 1.63

3. • Consider the following data:
• Gbp/usd: 1.7500/10
• 3 month forward: 1.7380/1.7400
• 3-month eurodollar:8.00/8.20% p.a
• 3-month euro sterling: 10.50/11.005 p.a
• Check whether there is a covered interest
arbitrage.

4. • Borrow $1for 3 months at 8.20% p.a., convert to
• GBP(1/1.7510) = GBP 0.5711, invest GBP at 10.50%
p.a. for three months; maturity value GBP
0.5711[1+(0.1050/4)] = GBP 0.5861, which sold forward
at 1.7380 yields $1.0186. Repayment of dollar loan
requires $1.0205 = 1+(0.0820/4). Net loss.
• Borrow GBP 1 at 11%; convert spot to $1.7500; invest at
8.0% p.a.; maturity value of deposit 1.75(1.02) =
$1.7850; sold forward at $1.7400 per GBP yield
GBP(1.7850/1.7400) = GBP 1.0259; repayment of GBP
loan requires GBP [1+(0.11/4)] = GBP 1.0275. Again net
loss.
• Hence no covered interest arbitrage opportunity.