Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Currently, the spot exchange rate is CHF 0.89/$ and the three-month forward exchange rate is CHF 0.86/$. The three-month interest rate is 5.6% per annum in the U.S. and 4.0% per annum in Switzerland. Assume that you can borrow as much as $1,120,000 or CHF 1,000,000.
- Determine whether the interest rate parity is currently holding.
- If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.
- Explain how the IRP will be restored as a result of covered arbitrage activities.
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