Question
. Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a
. Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-term money market investment and wonders whether he should invest in U.S. dollars for 90 days or make a covered interest arbitrage (CIA) investment in the Swiss franc. He faced the following exchange rate and interest rate quotes. *
a. 3.873% forward discount.
b. 3.873% forward premium.
c. 3.911% forward discount.
d. 3.911% forward premium.
e. None of the above
10. Referring to question 9, How can Casper execute the covered interest arbitrage (CIA) opportunity? *
a. Casper cannot earn arbitrage profit since interest rate differential is equal to forward premium.
b. Casper cannot earn arbitrage profit since interest rate differential is equal to forward discount.
c. Casper should invest in USA borrow in CHF.
d. Casper should invest in CHF and borrow in USD.
e. None of the above.
11. Referring to question 9, Casper can make a net profit from the covered interest arbitrage equal to: *
a. $12,927.75
b. $79,047.64
c. $13,656.38
d. $25,295.01
e. None of the above
Assumptions Arbitrage funds available Spot exchange rate (CHF/USD) 3-month forward rate (CHF/USD) USD 3-month interest rate Swiss franc 3-month interest rate Valie $1,000,000 0.9502 0.9410 3.800% 5.300% The forward premium or discount on Swiss franc (CHF) isStep by Step Solution
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