### CFA Practice Question

There are 253 practice questions for this study session.

### CFA Practice Question

Given the following table of information, describe the covered arbitrage opportunity.

A. No arbitrage opportunity exists. \$ investors will invest in \$ denominated securities and £ investors in £ denominated securities.
B. Both \$r investors and £ investors will invest in dollar denominated securities.
C. \$ investors will invest in £ denominated securities and £ investors in \$ denominated securities.
Explanation: Assume investments of \$10K or £ 10K. Dollar investors can earn \$10,000*(.11) = \$1,100 or (\$10,000/.4580)*.(1.08)*.4515 - \$10,000 = \$647. The £ investors can earn £10,000*(.08) = £ 800 or (£10,000*.4490)*(1.11)/.4620 - £10,000 = £788. Each investor can make more money investing in local markets than in foreign markets. The bid-ask spreads off set the interest arbitrage. Remember when exchanging currency or investing money, you always get the least desirable rate.

User Comment
ehc0791 The bid/ask in the interest rate confuses me.
wink44 ust remember that at each turn for the bid/ask you're going to have to pay the higher one, and sell the lower one. Meaning, when you exchange your USD for GBP, you're going to pay the ask (and give up more dollars). When you go to exchange your GBP for USD, you're going to receive less (the bid). Just remember that for each turn, you have to have to pay more and sell for less.
paolino9290 ehc0791: Re your question on interest rates, always bear in mind that you borrow at the higher rate and lend/invest at the lower rate
mishis so, if I want to avoid thinking through the logic details, how do I apply irate spreads to IRP formula, (1+ifgrn)/(1+idom)=e(s)/S

(1.11/1.08)*.449=.4615?
ramdabom good q
Warrior23 Paolino - Dont you mean borrow at the lower rate and lend at the higher. Why would you want to pay a higher rate to earn a lower one. You would lose the differential.