Solved: Can you generate covered interest arbitrage profits, Finance Basics

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Can you generate covered interest arbitrage profits

Problem:

The following interest rate and exchange rates are listed in London:

RUS: 4.6%-5.00%
REUR: 3.00%-3.4%
Spot Rate: EUR/USD 1.2280-1.2295
Forward Rate (1 Year) : EUR/USD 1.2390-1.2410

Assume that you have 10,000,000 EUR or USD 12,280,000 credit line to execute arbitrage. Can you generate covered interest arbitrage profits? What would be your profit?

A. USD147,869

B. EUR 10,427.07

C. EUR23,939

D. Transaction costs does not allow arbitrage!

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Finance Basics: Can you generate covered interest arbitrage profits

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