Suppose that you’re a FX trader for a bank in New York. You are faced with...

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Finance

Suppose that you’re a FXtrader for a bank in New York. You are faced with the followingmarket rates:
Spot exchange rate: Sfr0.9525/$. In other words, 1 US dollar = 0.9525Swiss francs
6 month US dollar interestrate = 0.80% per annum
6 month Swiss franc interestrate = 0.15% per annum
6 month forward exchange rate:= Sfr 0.9445/$
The maximum amount you mayborrow and/or invest is $10,000,000 or its equivalent in Swissfrancs.
a) Is there a covered interest arbitrage opportunity?Explain why or why not.
b) Continuing with the problem, spell out the actionsyou would take to profit from this situation. Your response shouldinclude step-by-step verbal explanations as well as detailedcalculations.
Which currency and how much of it would you borrow?Which currency and how much would you lend (invest)?
What is the forward transaction you would engage in?Specify which currency and what quantity of that currency you wouldsell forward and which currency and what quantity of it you wouldbuy forward.
What is the amount of arbitrage profits? Clearlyexplain your calculations in words.

Answer & Explanation Solved by verified expert

4.0 Ratings (726 Votes)

As per Interest Rate Parity Theoretical Forward Rate Sfr Spot Sfr1Interest Rate on Swiss Franc1Interest Rate on 095251000152100082 09494 Actual Forward Rate Theoretical Forward See Answer

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