Casper Landsten-CIA (A). Casper Landsten is a foreign exchange trader for a bank in New York. He has

$0.90.9

million (or its Swiss franc equivalent) for a short term money market investment and wonders if he should invest in U.S. dollars for three months, or make a CIA investment in the Swiss franc. He faces the following quotes:

Arbitrage funds available	$	900,000
Spot exchange rate (SFr/$)		1.2805
3-month forward rate (SFr/$)		1.2736
U.S. Dollar annual interest rate		4.803	%
Swiss franc annual interest rate		3.204	%

The CIA profit potential is

0.5680.568%,

which tells Casper Landsten he should borrow

U.S. dollars

and invest in the

lower

yielding currency, the

Swiss franc

,

in order to earn covered interest arbitrage (CIA) profits.(Round to three decimal places and select from the drop-down menus.)

The CIA profit amount is

$1317.251317.25.

(Round to the nearest cent.)

Casper Landsten-UIA (B). Casper Landsten is a foreign exchange trader for a bank in New York. Using the values and assumptions below, he decides to seek the full 4.802% return available in U.S. dollars by not covering his forward dollar receiptsan uncovered interest arbitrage (UIA) transaction. Assess this decision.

Arbitrage funds available

$

900,000

Spot exchange rate (SFr/$)

1.2805

3-month forward rate (SFr/$)

1.2738

Expected spot rate in 90 days (SFr/$)

1.2704

U.S. Dollar annual interest rate

4.802

%

Swiss franc annualinterest rate

3.198

%

The uncovered interest arbitrage (UIA) profit amount is $