Sunday, June 28, 2009

Covered Interest Arbitrage

Do a sell-buy in USD with spot rate at PKR 81 and 3 month forward at 83 which will create a USD liability maturing in 3 months. Take the PKR liquidity generated from the sell-buy into money market and earn 13% (on annualized basis). Walk away with 200 bps of clear arbitrage profits. Hows that?

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