STQ6D:  [NBAA: P17 INTERNATIONAL FINANCE  MAY 2003 Q4b]b) Suppose the interest r

STQ6D:  [NBAA: P17 INTERNATIONAL FINANCE  MAY 2003 Q4b]b) Suppose the interest rate on £ is 15% in London, and the interest rate on a comparable Tanzanian shilling investment in Dar Es Salaam is 10%. The £ spot rate is TZS1,750 and the one-year forward rate is TZS1,680. REQUIRED:Are there opportunities for covered interest arbitrage? Show relevant computations. (2 Marks)Is there covered interest differential in favor of London or Dar Es Salaam? (2 Marks)Illustrate the profits associated with covered interest arbitrage by showing the steps that a Tanzanian arbitrageur can take to profit from the discrepancy in rates. Assume that the borrowing and lending rates are identical and the bidask spread in the spot and forward market is zero. (5 Marks)

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