Profit from Covered Interest Arbitrage
Response to the following problem:
Today, the 1-year U.S. interest rate is 4 percent, while the 1-year interest rate in Argentina is 17 percent. The spot rate of the Argentine peso (AP) is $.44. The 1-year forward rate of the AP exhibits a 14 percent discount.
Determine the yield (percentage return on investment) to an investor from Argentina who engages in covered interest arbitrage.