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eagles_dare13

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tT
发表于 2013-3-31 13:11 | 只看该作者

covered interest diffrential (Economics)

interest
What does that mean? Any formula??
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lunarfollies

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2#
发表于 2013-3-31 13:11 | 只看该作者
Covered Interest Rate differential means the difference between the domestic interest rate and the hedge foreign rate. It should be zero otherwise arbitrage opportunities exist.
1+rdc = ((1+rfc)(Forward Rate))/ spot rate

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pawn

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3#
发表于 2013-3-31 13:11 | 只看该作者
he nailed it. If its different, arb exists and you should borrow the cheaper, lend the expensive.

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king_kong

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4#
发表于 2013-3-31 13:11 | 只看该作者
Do you know how to calculate the arbitrage profit. I am referring to Q120 in Schweser 2nd exam pm section.
Thanks

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liquidity

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5#
发表于 2013-3-31 13:11 | 只看该作者
1000 $ = 500 BU at Spot
1000 * 1.05 = 1050 $ needs to be repaid.
500 BU - 515 BU at forward - 1081.5 $ at forward.
so 31.5 profit.

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