Jason Smith is a foreign exchange trader. At a point in time, he noticed the following quotes.
Question:
Spot exchange rate........................................$:SFr = 1.6627
Six-month forward exchange rate...................... $:SFr = 1.6558
Six-month $ interest rate.................................. 3.5% per year
Six-month SFr interest rate............................... 3.0% per year
a. Ignoring transaction costs, was the interest rate parity holding?
b. Was there an arbitrage possibility? If yes, what steps would have been needed to make an arbitrage profit? Assuming that Jason Smith was authorized to work with $1 million for this purpose, how much would the arbitrage profit have been in dollars?
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a For six months r SFr 150 and r 175 Because the exchange rate is in SFr terms the appropriate expre...View the full answer
Answered By
Jehal Shah
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