Math  /  Algebra

QuestionB. Assume that one-year interest rate is 11%11 \% in the USA while the one. year interest rate in Ghana is 34%34 \%. A USA bank is prepared to buy tho Ghana Cedi at a discount of 13%13 \% one year from now. An investor wity $1,000,000\$ 1,000,000 in USA is considering whether it is worthwhile to take advantage of covered interest arbitrage. Assume a spot rate of $1\$ 1 to GHe1.4.
Required: i Determine whether covered interest arbitrage is worthwhile. (12 marks) ii. Give two reasons why the investor should not attempt covent

Studdy Solution
Provide reasons why the investor should not attempt covered interest arbitrage.
1. Exchange Rate Risk: Even with a forward contract, there is still a risk that the actual exchange rate fluctuations could affect the investor's returns if the contract terms are not honored or if there are unforeseen changes in the market conditions.
2. Political and Economic Stability: Investing in Ghana involves exposure to political and economic risks that may affect the stability of returns, such as changes in government policies, inflation, or economic downturns that could impact the Ghanaian currency and interest rates.

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