24. Brynja Johannsdottir and the Icelandic Carry- Trade. Brynja Johannsdottir is Icelandic by birth, but is working for Magma Capital, a currency hedge fund run out of New York. The high money market rates offered in Iceland have been supporting the carry-trade, as investors borrow in cheaper curren- cies (nearly any currency at this point) and invest for the short term in Icelandic krona. But they do so on an uncovered basis. Brynja believes that--at least for the coming three to six-month period-the krona will continue to stay strong, sticking at kr.70/$. Her bank requires that any position she takes yields at least 4.0% for the period in question (16% annually). Using the assumptions in the preceding table, she wishes to evaluate the uncovered interest arbi- trage (UIA) potential.

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Arbitrage funds available ($) Spot exchange rate (kr/s) Three-month forward rate (kr./$) Expected spot rate in go days (kr.) U.S. dollar three-month interest rate Icelandic krona three-month interest rate $2,000,000 71.6350 72.9127 70.0000 4.800% 12.020%