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

540,000 francs

=500,000(1.08)

$112,500

$108,000

profit = $4,500

CD

CS

8%

US credit market

CD

CS

8%

French credit market

D

S

5

P$

D

S

4.8

forward market

spot market

P$

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