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Explain what covered interest arbitrage is: and state the condition for covered interest parity. Suppose...

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Accounting

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Explain what covered interest arbitrage is: and state the condition for covered interest parity. Suppose that a covered interest arbitrage transaction is more profitable than domestic investment. Explain how covered interest parity' would be restored. Suppose the 3 month U.S. interest rate is 3% (0.03), the 3 month UK interest rate is 2% (0.02), the current spot rate is $2 = pound 1, and the 3 month forward rate is $2.04 = pound 1. Would an investor in USA choose to invest in the US or in the UK via covered interest arbitrage? Explain, and show all relevant calculations. A US investor wants to buy pound s spot, invest in the UK for 3 months and then sell the proceeds in the spot market. The 3 month interest rate in UK is 1.25% (0.0125), today's spot rate is pound 1 = $1.5, and the investor expects the spot rate to be pound 1 = $1.6 in 3 months time. What is the investor's expected RATE of return from such an investment? Show and explain all relevant calculations

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