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The following information has been extracted from a bank based on New York and the...

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Finance

The following information has been extracted from a bank based on New York and the central banks of USA and Switzerland.

Spot exchange rate

SFr1.2251/$

Six-month forward exchange rate

SFr1.1922/$

Six-month $ interest rate

2.25% per year

Six-month SFr interest rate

2.15% per year

Given the information, answer the following:

a. Evaluate whether interest rate parity holds or not. Please ignore transaction cost [2 Mark].

b. Is there any covered interest arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that You start with $500,000, compute the percentage of arbitrage profit in dollars .[8 Marks]

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