Consider a hypothetical situation with the following information:
Spot Rate of Canadian dollar: $0.76
180-day forward rate of Canadian dollar: $0.85
180-day Canadian interest rate: 4%
180-day US interest rate: 4.5%
Given the information above, compute the 180-day net yield to the investor who carries out a covered interest arbitrage.
PS: I would like to share with you some class notes that might be helpful:
Suppose that ih – if < P. Then, the net yield from the covered interest arbitrage is given by (if + P) – ih.
What if the direction is the opposite? Suppose that ih – if > P i.e. ih > if +P. Then, the net yield from the foreigners point of view will be ih – (if + P).