CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

How much will a trader make through covered interest arbitrage under the following exchange and interest rate conditions (assume the investment horizon is 1 year). Borrow $100 at an interest rate of 4%. Convert the dollars to CNY at the spot rate of $0.1920. Invest the CNY in China at 8% interest. Sell the CNY at the forward rate of 0.1879. What is the profit on the transaction?
A. $2.5
B. $1.69
C. $5.69
Explanation: You borrow $100 and owe $104 at the end of a year. Convert the dollars to CNY, at $100/.192 = CNY 520.83. Invest the CNY 520.83 at 8% interest, yielding CNY 562.50 at the end of a year. Sell CNY 562.5 forward for on year at the one year forward rate of 0.1879, for 562.5 x .1879 = $105.69. Repay the loan for $104, and earn a riskless profit of $1.69.

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