A) Suppose you can invest in NZD at 5.127%, or you can invest in CHF at 5.5%. You are a resident of New Zealand, and the current spot rate is 0.79005/20 NZD/CHF.

Required:

1. Identify the factors would affect the bid-ask spread in the forward markets. (2 marks)
2. Compute the 6- month forward rate and determine which currency is stronger over this horizon. (3 marks)
3. Assuming you want to work with NZD 1,000,000, illustrate how you can exploit an arbitrage opportunity if the 6-month forward market quotation is 0.78000/20 NZD/CHF. (5 Marks)