Casper Landsten-Thirty Days Later. Casper Landsten once again has $1.1 million (or its Swiss franc equivalent) to invest for three months. He now faces the following rates. Should he enter into a covered interest arbitrage (CIA) investment? Arbitrage funds available Spot exchange rate (SFr/S) 3-month forward rate (SFr/S) U.S. Dollar annual interest rate Swiss franc annual interest rate $ 1,100,000 1.3392 1.3287 4.754 % 3.628 % The CIA profit potential is 2.035 %, which tells Casper Landsten he should borrow U.S. dollars and invest in the lower yielding currency, the Swiss franc, and then sell the Swiss franc principal and interest forward three months locking in a CIA profit. (Round to three decimal places and select from the drop-down menus.) The CIA profit amount is $. (Round to the nearest cent.)

Casper Landsten-Thirty Days Later. Casper Landsten once again has $1.1 million (or its Swiss franc equivalent) to invest for three months. He now faces the following rates. Should he enter into a covered interest arbitrage (CIA) investment? Arbitrage funds available Spot exchange rate (SFr/S) 3-month forward rate (SFr/S) U.S. Dollar annual interest rate Swiss franc annual interest rate $ 1,100,000 1.3392 1.3287 4.754 % 3.628 % The CIA profit potential is 2.035 %, which tells Casper Landsten he should borrow U.S. dollars and invest in the lower yielding currency, the Swiss franc, and then sell the Swiss franc principal and interest forward three months locking in a CIA profit. (Round to three decimal places and select from the drop-down menus.) The CIA profit amount is $. (Round to the nearest cent.)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 44QA

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(a) Jade Smith is a foreign exchange trader for a bank in New York. He has $1 million for a short-term money market investment and he faces the following quotes: (Assuming there are 360 days a year) Spot exchange rate (SFr/$) 1.2810 3-month forward rate (SFr/$) 1.2740 US dollar annual interest rate 4.8% Swiss franc annual interest rate 3.2% He wonders whether he should invest in US dollars for 90 days or make a covered interest arbitrage (CIA) investment in the swiss franc, and what is the profit/loss if he carries out this investment. (b) Using the same values in the table above, Jade decides to seek the full 4.8% return available in the US dollars by not covering his forward dollar receipts – an uncovered interest arbitrage (UIA) transaction. What is the maximum expected spot exchange rate (SFr/$) at the end of the 90-day period at which Jade can avoid losing money?
. Peder Mueller is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) to invest for three months. Using the following values and assumptions, Spot exchange rate (CHF-USD1.00) 3-month forward rate (CHF-USD1.00) Expected spot rate in 3 months (CHF=USD1.00) U.S. dollar 3-month interest rate (%) Swiss franc 3-month interest rate (%) 1.2810 1.2740 1.2700 4.800 3.200 He decides not cover his forward dollar receipts-an uncovered interest arbitrage (UIA) transaction. How much profit can he make if his assumptions are true? $4,731 b. $1,538 c. $7,061 d. $12,765
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