The Average Uncovered Rate of Return - Assignment Example

Ruh= (1+ % change in DQ) * (1+rf) -1.  Ruh = (1 + 0.05568)(1 + 0.046) – 1 = 10.424 %.

Q3. During the assigned period, what was the average uncovered rate of return from the foreign country's viewpoint?

Ruf= (1+ % change in IQ) * (1+rh) -1. Rh = (1 – 0.0483) (1 + 0.037) – 1 =  -  1.3087 %.

Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and exchange rate changes during the assigned period you should have: Invested/ borrowed (choose one) in the US and invested/borrowed (choose one) in the foreign country.

Since RUH is greater than RH, the investors should borrow from the US and invest in Canada.

Q5. Assume that you could both borrow and invest at the average interest rates prevailing in the country and in the US during the assigned time period. Also, assume that you have a line of credit for one million dollars in the US or an equivalent amount in a foreign country. Given perfect hindsight about interest rates and exchange rate changes, please calculate your total profit in dollars using uncovered interest arbitrage during the assigned time period if you followed the strategy chosen in Q4.

RUH – RH = uncovered interest arbitrage. The total profit = (uncovered interest arbitrage * borrowed amount. Total profit = (0.10424 – 0.013087) * 1,000,000 = $ 91,153.