3.CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has...

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3.CIA Susan Prescott is a foreign exchangetrader for a bank in New York. She has $1 million (or its Swissfranc equivalent) for a short term money market investment andwonders if she should invest in U.S. dollars for three months, ormake a covered interest arbitrage (CIA) investment in the Swissfranc. She faces the following quotes:
Assumptions
Value
SFr. Equivalent
Arbitrage funds available
$1,000,000
SFr. 994,000
Spot exchange rate (SFr./$)
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â .9940
3-month forward rate (SFr./$)
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â .9910
U.S. dollar 3-month interest rate
2.600% pa
Swiss franc3-month interest rate
1.600% pa
What should Susan do?

Answer & Explanation Solved by verified expert

4.4 Ratings (668 Votes)

Arbitrage fund available 1000000 or SFr 994000 USD Interest Rate 26 per annum Swiss France Interest Rate 13 Spot Rate SFr 0994 and Forward Rate SFr 0991 In order to See Answer

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3.CIA Susan Prescott is a foreign exchangetrader for a bank in New York. She has $1 million (or its Swissfranc equivalent) for a short term money market investment andwonders if she should invest in U.S. dollars for three months, ormake a covered interest arbitrage (CIA) investment in the Swissfranc. She faces the following quotes:



	Assumptions		Value	SFr. Equivalent
	Arbitrage funds available		$1,000,000	SFr. 994,000
	Spot exchange rate (SFr./$)		Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â .9940
	3-month forward rate (SFr./$)		Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â .9910
	U.S. dollar 3-month interest rate		2.600% pa
	Swiss franc3-month interest rate	1.600% pa