Top 11 Covered Interest Arbitrage Questions You Need To Solve


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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)

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]

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