I've gotten into the habit of converting all forex related items in the curriculum to FCC. That said, I'm hoping someone can give me an answer to the following question that will lock down covered interest arbitrage for me.
If spot FCC x r(DC)/r(FC) > Forward FCC, do I borrow foreign or domestic for the arb?
E.g. Implied forward = 115 while forward is trading 110.
I do my arbs different than book but I will attempt with your facts.
Without numbers, I struggle with these.
I would borrow foreign at rFC
I would convert at spot to DC
I would invest at rDC
I would covert back to rFC at forward to pay off loan.
I should have more money because I am supposed to pay 115 to get 1 DC and I only have to pay 110.
Its really obvious when you have real numbers to plug in because if you do it wrong you lose money.
Edited 1 time(s). Last edit at Thursday, May 26, 2011 at 09:34PM by stingreye.
发表于 2011-7-13 13:28
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C. That said, I'm hoping someone can give me an answer to the following question that will lock down covered interest arbitrage for me.