BID ASK i(USD,180d) 1.95% 2.05%...
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Accounting
|
| BID | ASK |
| i(USD,180d) | 1.95% | 2.05% |
| i(GBP,180d) | 0.70% | 0.80% |
| S(USD/GBP) | 9.0000 | 9.0400 |
| F(USD/GBP,180d) | 9.1250 | 9.1400 |
Question: Please give detailed workings:
Can you identify a protable covered interest arbitrage strategy and if yes how large is its prot if you use USD 1 million for this trade? In order to identify arbitrage opportunities in the presence of a bid-ask spread, you now have to check the two possible arbitrage strategies: investing in GBP with money borrowed in USD and investing in USD with money borrowed in GBP with the exchange risk being hedged in both cases.
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