The 1-year Interest Rates in Norway, 𝑖𝑁𝑂𝐾, is Equal to 3%

Answer for The 1-year interest rates in Norway, 𝑖𝑁𝑂𝐾, is equal to 3% in $2 Only  (Instant Download)

Norway

The 1-year interest rates in Norway, 𝑖𝑁𝑂𝐾, is equal to 3%; – The 1-year interest rates in the US, π‘–π‘ˆπ‘† is equal to 1%; – Spot exchange rate is equal to 𝑆 ( 𝑁𝑂𝐾 π‘ˆπ‘†π·) = 𝑁𝑂𝐾 π‘ˆπ‘†π· 8; – The 1-year forward rate is 𝐹 ( 𝑁𝑂𝐾 π‘ˆπ‘†π·) = 𝑁𝑂𝐾 π‘ˆπ‘†π· 8.5

Observing the data, you discovered an arbitrage opportunity. Show how to realize a certain profit via covered interest arbitrage. Assume that you can borrow either USD 1,000,000 or NOK 1,000,000 for one year. (Hint: In order to perform a covered interest arbitrage, you borrow in one country and you invest in the other. Thus, you need to decide in which country you borrow, then invest in the other.)

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