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Covered Interest Arbitrage— Raul Thinks Big

Covered Interest Arbitrage— Raul Thinks Big. International Finance Dick Sweeney. Where to Deposit Funds? Schema. Start with SEK 1m Finish with SEK ??. SEK 1m / S. SEK 1m. (SEK 1m / S) x (1 + i usd ) x F. SEK 1m x (1 + i sek ). * Sell SEK 1m for USD at spot rate S

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Covered Interest Arbitrage— Raul Thinks Big

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  1. Covered Interest Arbitrage—Raul Thinks Big International Finance Dick Sweeney

  2. Where to Deposit Funds? Schema Start with SEK 1m Finish with SEK ?? SEK 1m / S SEK 1m (SEK 1m / S) x (1 + iusd) x F SEK 1m x (1 + isek) *Sell SEK 1m for USD at spot rate S *Deposit USD at iusd *Convert (1 + iusd) to SEK at forward rate F Deposit SEK 1m at isek

  3. Where to Deposit Funds? Alternative Payoffs Difference = 1.0213625m - 1.0200m = SEK 1362.5 Start with SEK 1 m Finish with SEK ?? SEK 1 m / S = 1 m / 10 = USD 100,000 USD 100,000 x (1 + 4.50/400) x SEK 10.1 = SEK 1.0213625m SEK 1 m SEK 1 m x (1 + 8.00/400) = SEK 1.0200 m *Sell SEK 1 m for USD at spot rate S *Deposit USD at iusd *Convert (1 + iusd) to SEK at forward rate F Deposit SEK 10,000 at isek

  4. Covered Interest Arbitrage:Schema Borrow SEK from SEBank Lend USD to LABank Deliver USD, Get SEK Sell SEK Get USD Sell USD Forward to SEBank for SEK Sell SEK to SEBank for USD, to Lend USD to LABank

  5. Covered Interest Arbitrage: Profits Profits: SEK 1362.5 in 3 mths, SEK ???? now Borrow SEK from SEBank (8 %) Lend USD to LABank (4.5 %) Deliver USD, Get SEK, at 10.1 Sell SEK Get USD, at 10.0 Sell USD Forward to SEBank for SEK Sell SEK Spot to SEBank for USD, to Lend USD to LABank

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