Ultimate goal? Determine if Covered Interest Arbitrage is possible or not. State

Question

Ultimate goal? Determine if Covered Interest Arbitrage is possible or not. State whether yes or no.

Step 1) On Day 1, convert U.S. dollars to Thai baht and set up a 90-day deposit account at a Thai bank

Step 2) In 90 days, the Thai deposit will mature to ……fill in………which is the amount to be sold forward

Step 3) In 90 days, convert the Thai baht into U.S. dollars at the agreed-upon rate

Step 4) Dollar amount available on a 90-day U.S. deposit

Step 5) Dollar profit over and above the dollar amount available on a 90-day U.S. deposit

Explanation / Answer

No, Covered Interest Arbitrage is not possible as simulatneous transactions have been entered into in both the currencies to cover up for the interest rate mismatch

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