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  3. part iii: interest rate parity and covered interes

Part III: Interest Rate Parity and Covered Interest Arbitrage Assume the following information: Current spot...

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Part III: Interest Rate Parity and Covered Interest Arbitrage Assume the following information: Current spot rate of Australian dollar = $.65 Forecasted spot rate of Australian = $.69 dollar 1 year from now 1-year forward rate of Australian = $.68 dollar Annual interest rate for Australian = 5% dollar deposit Annual interest rate in the United = 8% States 1. According to Interest Rate Parity, is the covered interest arbitrage feasible to U.S. investors and Australian investors? Please explain your answers (20 points). Suppose an U.S. investor can borrow up to S500,000 to invest and an Australian investor can borrow up to Australian $800,000 to invest. How much is the covered interest rate arbitrage profit for the U.S. investor and Australian investor if the covered interest arbitrage is feasible to them (20 points)

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