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An Indian importer has three months payable of GBP 1,200,000. The GBPIINR spot and forward rates available today in the market are as follows: Spot: 91.4DI’45; lmf: 103’14; me: 1500; 3111f: 252’30’, 6mf: 13i10

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An Indian importer has three months payable of GBP 1,200,000. The GBPIINR spot and forward rates available today in the market are as follows: Spot: 91.4DI’45; lmf: 103’14; me: 1500; 3111f: 252’30’, 6mf: 13i10 The prevailing interest rates are as follows: USA: 3% – 3.5%; INDIA: 6% – 7% If expected GBPI’INR Spot after 3 months 91.75f80 then suggest rational strategy to the importers between forward hedging and money market hedging. Also suggest that whether interest rate parity is currently holding or not based on following information: Spot: $1.50!:E; 3mf: $1.52/£; 3-month interest rate is 8.0 96 in the U.S. and 5.8% in the UK. Assume that you can borrow as much as $1,500,000 or £1,000,000. Determine. If [RP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

 
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