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/$

Now:

borrow $100,000

500,000 francs

Lend in

France’s

credit

market

540,000 francs

=500,000(1.08)

$112,500

buy francs

buy forward contract in $s

pay back

your loan

(Don’t forget

the interest!)

Convert francs to

$s using forward contract

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