Covered Interest Arbitrage

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Covered Interest ArbitrageRaul Thinks Big

• International Finance
• Dick Sweeney

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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)
Deposit SEK 1m at isek
Sell SEK 1m for USD at spot rate S Deposit USD
at iusd Convert (1 iusd) to SEK at forward
rate F
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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
Deposit SEK 10,000 at isek
Sell SEK 1 m for USD at spot rate S Deposit USD
at iusd Convert (1 iusd) to SEK at forward
rate F
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Covered Interest ArbitrageSchema
Borrow SEK from SEBank Lend USD to LABank
Deliver USD, Get SEK
Sell SEK
Get USD
Sell SEK to SEBank for USD, to Lend USD to
LABank
Sell USD Forward to SEBank for SEK
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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