C. Interest Arbitrage

U.S.

i=8%

France

i=8%

Exchange Rate

5 francs/$

One year

from now:

360-day Forward

exchange rate

4.8 francs/$

Assuming that you can borrow and lend at the US’s and

France’s interest rates, determine a way to make money

by borrowing in one country’s credit market, converting

to the other currency and then lend in the other country’s

credit market. Work in terms of 100,000 of one of the

currencies.

Now: