Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. suppose that you’re a fx trader for a bank in ne

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

60.1K

Verified Solution

Question

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
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

A machine costing $250,000 with a five-year life and an estimated $25,000 salvage value is installed in...

Accounting
Q

A magnetic dipole M AI B J Wb is placed in magnetic field B Cx...

Physics
Q

A particle moving with uniform retardation covers distances 18m 14m and 10m in successive seconds...

Physics
Q

rk Questi Par mine a the area and b the perimeter of the qua

Calculus
Q

Consider f(z) = - 8z5e3zDetermine the intervals on which f is decreasing.Of is decreasing on:Of...

Calculus
Q

Break-Even Units and Sales Revenue: Margin of Safety Dupli-Pro Copy Shop provides photocopying...

Accounting
Q

Question 4 Liger Company had the following information: Common stock, $1 par value,...

Accounting
Q

Jim Young owes 57,600 on a 7%,140-day note. On day 45, he pays $17,280 on...

Accounting
Q

Laker Company reported the following January purchases and sales data for its only product. For...

Accounting
Q

bradley a 56 year old taxpayer earned 40,000 in wages what is the maximum contribution...

Accounting
Q

QUESTION TWO (20marks) Distinguish between a procedural audit and a balance sheet audit (8marks)...

Accounting
Q

Select your favorite company: For example, Naver, Kakao, Apple, etc. Make financial analyses: Horizontal,...

Accounting