Let's suppose you have $1 million to invest.
You are considering to invest in UK first, then convert the British Pound back to US$ in the future.
You know following information:
Annual Interest rate on investment in US: 2%
Annual Interest rate on investment in UK: 4%
Investment period: 1 year
Current exchange rate: 1.52 $/BP
Forward exchange rate which you can apply when converting BP to US$: 1.50 $/BP
What will be profit or loss if you apply the covered-interest arbitrage?
Profit, about $36,838
Profit, about $28,424
Profit, about $16,645
Profit, about $26,315