I’ve gotten into the habit of converting all forex related items in the curriculum to FC:DC. That said, I’m hoping someone can give me an answer to the following question that will lock down covered interest arbitrage for me. If spot FC:DC x r(DC)/r(FC) > Forward FC:DC, do I borrow foreign or domestic for the arb? E.g. Implied forward = 115 while forward is trading 110. TIA
I do my arbs different than book but I will attempt with your facts. Without numbers, I struggle with these. I would borrow foreign at rFC I would convert at spot to DC I would invest at rDC I would covert back to rFC at forward to pay off loan. I should have more money because I am supposed to pay 115 to get 1 DC and I only have to pay 110. Its really obvious when you have real numbers to plug in because if you do it wrong you lose money.